The telencephalon is organized into distinct longitudinal domains: the cerebral cortex and the basal ganglia. The basal ganglia primarily consists of a dorsal region (striatum) and a ventral region (pallidum). Within the telencephalon, the anlage of the pallidum expresses the Nkx2.1 homeobox gene. A mouse deficient in Nkx2.1 function does not form pallidal structures, lacks basal forebrain TrkA-positive neurons (probable cholinergic neurons) and has reduced numbers of cortical cells expressing GABA, DLX2 and calbindin that migrate from the pallidum through the striatum and into the cortex. We present evidence that these phenotypes result from a ventral-to-dorsal transformation of the pallidal primordium into a striatal-like anlage.