In order to study the regional specification of neural tissue we isolated Xotx2, a Xenopus homolog of the Drosophila orthodenticle gene. Xotx2 is initially expressed in Spemann's organizer and its expression is absent in the ectoderm of early gastrulae. As gastrulation proceeds, Xotx2 expression is induced in the overlying ectoderm and this domain of expression moves anteriorly in register with underlying anterior mesoderm throughout the remainder of gastrulation. The expression pattern of Xotx2 suggests that a wave of Xotx2 expression (marking anterior neurectoderm) travels through the ectoderm of the gastrula with the movement of underlying anterior (prechordal plate) mesoderm. This expression of Xotx2 is reminiscent of the Eyal-Giladi model for neural induction. According to this model, anterior neural-inducing signals emanating from underlying anterior mesoderm transiently induce anterior neural tissues after vertical contact with the overlying ectoderm. Further patterning is achieved when the ectoderm receives caudalizing signals as it comes in contact with more posterior mesoderm during subsequent gastrulation movements. Functional characterization of the Xotx2 protein has revealed its involvement in differentiation of the anterior-most tissue, the cement gland. Ectopic expression of Xotx2 in embryos induces extra cement glands in the skin as well as inducing a cement gland marker (XAG1) in isolated animal cap ectoderm. Microinjection of RNA encoding the organizer-specific homeo-domain protein goosecoid into the ventral marginal zone results in induction of the Xotx2 gene. This result, taken in combination with the indistinguishable expression patterns of Xotx2 and goosecoid in the anterior mesoderm suggests that Xotx2 is a target of goosecoid regulation.