We report the isolation and characterization of caudal (cad), a previously unknown Drosophila homeo box-containing gene from the 38E region on the left arm of the second chromosome. This homeo box has diverged from the prototype sequence in Antennapedia, but contains subregions which are highly homologous. By Northern analysis and in situ hybridization experiments two transcripts of 2.4 kb were found to accumulate in nurse cells and in the oocyte during oogenesis. These transcripts generate a transient concentration gradient along the antero-posterior axis at the syncytial blastoderm stage. At the cellular blastoderm stage transcripts accumulate in a single band from 13-19% egg length at the posterior end. One zygotic transcript of 2.6 kb is detected. At later stages this transcript is localized in ectodermally and endodermally derived tissues such as the proctodeum, the Malpighian tubules and the posterior midgut. The 2.6-kb transcript is detectable until the onset of metamorphosis.