Previous analysis employing chimeric and transgenic rescue experiments has suggested that Otx2 is required in the neuroectoderm for development of the forebrain region. In order to elucidate the precise role of Otx2 in forebrain development, we attempted to generate an allelic series of Otx2 mutations by Flp- and Cre-mediated recombination for the production of conditional knock-out mice. Unexpectedly, the neo-cassette insertion created a hypomorphic Otx2 allele; consequently, the phenotype of compound mutant embryos carrying both a hypomorphic and a null allele (Otx2(frt-neo/-)) was analyzed. Otx2(frt-neo/-) mutant mice died at birth, displaying rostral head malformations. Molecular marker analysis demonstrated that Otx2(frt-neo/-) mutant embryos appeared to undergo anterior-posterior axis generation and induction of anterior neuroectoderm normally; however, these mutants subsequently failed to correctly specify the forebrain region. As the rostral margin of the neural plate, termed the anterior neural ridge (ANR), plays crucial roles with respect to neural plate specification, we examined expression of molecular markers for the ANR and the neural plate; moreover, neural plate explant studies were performed. Analyses revealed that telencephalic gene expression did not occur in mutant embryos due to defects of the neural plate; however, the mutant ANR bore normal induction activity on gene expression. These results further suggest that Otx2 dosage may be crucial in the neural plate with respect to response to inductive signals primarily from the ANR for forebrain specification.