Hydra is an excellent model system for developmental biology, because pattern formation processes can be easily studied in regeneration, transplantation, and reaggregation experiments. At the cellular level hydra has the advantage that it contains only a few basic cell types and that differentiation pathways are short. Two types of signals, produced and released by nerve cells, control the spatial and temporal patterns of differentiation. Positive signals induce specific local differentiation events, and negative signals inhibit the spread of such inductions to larger areas. Head-specific growth and differentiation are controlled by head activator and head inhibitor, food-specific processes are regulated by foot activator and foot inhibitor. The activators are peptides, the inhibitors are low-molecular-weight substances. The sequence of the head activator is known, and it is conserved throughout the animal kingdom. At the cellular level head activator exerts three types of effects in hydra. It stimulates cells to divide, and it is responsible for the determination and the final differentiation of nerve cells and head-specific epithelial cells. For nerve-cell differentiation the cAMP pathway is used as second messenger system. Components of this pathway were identified in hydra. In mammals head activator is produced by nerve and neuro-endocrine cells, and it acts as mitogen on cells of neural origin. It is present early in neural development and in abnormal neural development, such as brain and neuroendocrine tumours.