The Pax-6 gene encodes a transcription factor that is expressed in regionally restricted patterns in the developing brain and eye. Here we describe Pax-6 expression in the early forebrain (prosencephalon) on embryonic day 9.5 (E9.5) to E10.5 using both whole-mount in situ hybridization and antibody labeling. We find close correlations between Pax-6+ domains and initial neural patterning, and identify corresponding defects in embryos homozygous for the Pax-6 allele, Small eye (Sey). Pax-6 expression defines the prosencephalon-mesencephalon boundary, and mutant embryos lack this morphological boundary. Markers of the caudal prosencephalon are lost (Pax-6, Lim-1, Gsh-1) and a marker for mesencephalon is expanded rostrally into the prosencephalon (Dbx). We conclude that the caudal prosencephalon (prosomere 1) is at least partially transformed to a mesencephalic fate. This transformation results in a specific deficit of posterior commissure axons. Sey/Sey embryos also exhibit an axon pathfinding defect specific to the first longitudinal tract in the prosencephalon (tpoc, tract of the postoptic commissure). In wild type, tpoc axons fan out upon coming in contact with a superficial patch of Pax-6+ neuron cell bodies. In the mutant, the tpoc axons have normal initial projections, but make dramatic errors where they contact the neuron cell bodies, and fail to pioneer this first tract. Thus Pax-6 is required for local navigational information used by axons passing through its domain of expression. We conclude that Pax-6 plays multiple roles in forebrain patterning, including boundary formation, regional patterning, neuron specification and axon guidance.