We analysed the role of the prechordal plate in forebrain development of chick embryos in vivo. After transplantation to uncommitted ectoderm a prechordal plate induces an ectopic, dorsoventrally patterned, forebrain-like vesicle. Grafting laterally under the anterior neural plate causes ventralization of the lateral side of the forebrain, as indicated by a second expression domain of the homeobox gene NKX2.1. Such a lateral ventralization cannot be induced by the secreted factor Sonic Hedgehog alone, as this is only able to distort the ventral forebrain medially. Removal of the prechordal plate does not reduce the ros-trocaudal extent of the anterior neural tube, but leads to significant narrowing and cyclopia. Excision of the head process results in the caudal expansion of the NKX2.1 expression in the ventral part of the anterior neural tube, while PAX6 expression in the dorsal part remains unchanged. We suggest that there are three essential steps in early forebrain patterning, which culminate in the ventralization of the forebrain. First, anterior neuralization occurs at the primitive streak stage, when BMP-4-antago-nizing factors emanate from the node and spread in a planar fashion to induce anterior neural ectoderm. Second, the anterior translocation of organizer-derived cells shifts the source of neuralizing factors anteriorly, where the relative concentration of BMP-4-antagonists is thus elevated, and the medial part of the prospective forebrain becomes competent to respond to ventralizing factors. Third, the forebrain anlage is ventralized by signals including Sonic Hedgehog, thereby creating a new identity, the prospective hypothalamus, which splits the eye anlage into two lateral domains.