We have generated a gene trap insertion into the protein tyrosine phosphatase-BL (PTP-BL) locus, which produces a fusion of the N-terminal half of PTP-BL with beta-galactosidase. During development, beta-galactosidase activity was seen in all epithelial cells: strong staining was observed in the stomach and kidney epithelium, the ependymal layer of the central nervous system, and the surface ectoderm. Particularly prominent beta-galactosidase activity was seen in the peripheral nervous system, which correlated with neurite outgrowth. In epithelial cells, staining was seen in the apical portion of the cells. In nerves, beta-galactosidase activity was associated with growth cones as well as with Schwann cells. This suggests that the amino-terminal portion of PTP-BL contains sequences sufficient to target the fusion protein to specific subcellular compartments. In situ hybridization with a PTP-BL probe demonstrated that all tissues in which beta-galactosidase activity was seen were genuine sites of expression of the PTP-BL gene, although differences in the stability of the PTP-BL protein and the PTP-BL-beta-galactosidase fusion protein may exist. The distribution of beta-galactosidase activity in the peripheral nervous system, together with the structure of the wild-type protein, suggests that this phosphatase may have a role in regulation of the cytoskeleton during the development of the peripheral nervous system.