The products of the mammalian Pbx and Drosophila exd genes are able to interact with Hox proteins specifically and to increase their DNA binding affinity and selectivity. In the accompanying paper we show that Pbx proteins exist as stable heterodimers with a novel homeodomain protein, Prep1. Here we show that Prep1-Pbx interaction presents novel structural features: it is independent of DNA binding and of the integrity of their respective homeodomains, and requires sequences in the N-terminal portions of both proteins. The Prep1-Pbx protein-protein interaction is essential for DNA-binding activity. Prep1-Pbx complexes are present in early mouse embryos at a time when Pbx is also interacting with Hox proteins. The use of different interaction surfaces could allow Pbx to interact with Prep1 and Hox proteins simultaneously. Indeed, we observe the formation of a ternary Prep1-Pbx1-HOXB1 complex on a HOXB1-responsive target in vitro. Interaction with Prep1 enhances the ability of the HOXB1-Pbx1 complex to activate transcription in a cooperative fashion from the same target. Our data suggest that Prep1 is an additional component in the transcriptional regulation by Hox proteins.