Cells with distinct developmental histories can respond differentially to identical signals, suggesting that signals are interpreted in a fashion that reflects a cell's identity. How this might occur is suggested by the observation that proteins of the homeodomain family, including a newly identified human protein, enhance the DNA-binding activity of serum response factor, a protein required for the induction of genes by growth and differentiation factors. Interaction with proteins of the serum response factor family may allow homeodomain proteins to specify the transcriptional response to inductive signals. Moreover, because the ability to enhance the binding of serum response factor to DNA residues within the homeodomain but is independent of homeodomain DNA-binding activity, this additional activity of the homeodomain may account for some of specificity of action of homeodomain proteins in development.