The upper side of the angiosperm leaf is specialized for efficient capture of sunlight whereas the lower side is specialized for gas exchange. In Arabidopsis, the establishment of polarity in the leaf probably requires the generation and perception of positional information along the radial (adaxial versus abaxial or central versus peripheral) dimension of the plant. This is because the future upper (adaxial) side of the leaf develops from cells closer to the centre of the shoot, whereas the future under (abaxial) side develops from cells located more peripherally. Here we implicate the Arabidopsis PHABULOSA and PHAVOLUTA genes in the perception of radial positional information in the leaf primordium. Dominant phabulosa (phb) and phavoluta (phv) mutations cause a dramatic transformation of abaxial leaf fates into adaxial leaf fates. They do so by altering the predicted sterol/lipid-binding domains of ATHB14 and ATHB9, proteins of previously unknown function that also contain DNA-binding motifs. This change probably renders the protein constitutively active, implicating this domain as a central regulator of protein function and the PHB and PHV proteins as receptors for an adaxializing signal.