The ZIC2 transcription factor is one of the genes most commonly mutated in Holoprosencephaly (HPE) probands. Studies in cultured cell lines and mice have shown a loss of ZIC2 function is the pathogenic mechanism but the molecular details of this ZIC2 requirement remain elusive. HPE arises when signals that direct morphological and fate changes in the developing brain and facial primordia are not sent or received. One critical signal is sent from the prechordal plate (PrCP) which develops beneath the ventral forebrain. An intact NODAL signal transduction pathway and functional ZIC2 are both required for PrCP establishment. We now show that ZIC2 acts downstream of the NODAL signal during PrCP development. ZIC2 physically interacts with SMAD2 and SMAD3, the receptor activated proteins that control transcription in a NODAL dependent manner. Together SMAD3 and ZIC2 regulate FOXA2 transcription in cultured cells and Zic2 also controls the foxA2 expression during Xenopus development. Variant forms of the ZIC2 protein, associated with HPE in man or mouse, are deficient in their ability to influence SMAD-dependent transcription. These findings reveal a new mechanism of NODAL signal transduction in the mammalian node and provide the first molecular explanation of how ZIC2 loss-of-function precipitates HPE.