A morphotype of the forebrain of gnathostomes, i.e. those characters that must have been present in the forebrain of ancestral gnathostomes, was generated by using out-group analysis to identify the shared primitive characters present in the forebrains of extant gnathostomes. The nature of morphotypes and the steps in generating a morphotype are described. Because hypotheses of phylogenetic relationships profoundly affect the resulting morphotype, current hypotheses of gnathostome interrelationships are reviewed, and particular attention is paid to the problematic relationships of lobe-finned fishes. Ontogenetic studies provide the most common basis for how neural characters are grouped, and a review of the developmental literature indicates that gnathostome forebrains are segmented, with the diencephalon arising from a rostral parencephalic neuromere, which subsequently forms anterior and posterior divisions, and a more caudal synencephalic neuromere. Unfortunately, there is no agreement concerning the number of segments that form the secondary prosencephalon (telencephalon and hypothalamus). For this reason, the characters of the secondary prosencephalon must be analyzed in a topological manner. An out-group analysis of the characters of the diencephalon of extant gnathostomes reveals that the diencephalon of ancestral gnathostomes must have arisen from three segments: an anterior parencephalic segment, which gave rise to intermediate, ventrolateral and ventromedial thalamic nuclei; a posterior parencephalic segment, which gave rise to dorsal and ventral habenular nuclei, anterior, dorsal posterior, dorsal central, and, possibly, lateral posterior thalamic nuclei, and posterior tubercular nuclei; a synencephalic segment, which gave rise to pretectal nuclei, accessory optic nuclei and the nucleus of the medial longitudinal fascicle. The pretectal and posterior tubercular regions of ray-finned fishes appear to be highly derived, due to extensive cellular proliferations that give rise to numerous nuclei. The secondary prosencephalon of ancestral gnathostomes was probably divided rostrally into inverted and evaginated cerebral hemispheres, with paired olfactory bulbs arising directly from the hemispheres, and caudally into preoptic and hypothalamic areas. The cerebral hemispheres likely comprised a dorsally situated pallium divided into medial, dorsal and lateral pallial formations, as well as an intercalated pallial nucleus situated ventrolateral to the lateral pallium, and a ventrally situated subpallium divided medially into septal nuclei and a medial amygdalar nucleus and laterally into a corpus striatum. Both pallial and subpallial centers of ancestral gnathostomes probably received ascending thalamic and posterior tubercular inputs, with telencephalic efferent pathways terminating primarily in the hypothalamus, posterior tubercle and midbrain tegmentum. An out-group analysis further indicates that some taxa in each gnathostome radiation exhibit highly derived telencephalic characters due to the independent expansion of one or more pallial formations.