Neural induction in Xenopus requires the activation of new sets of genes that are necessary for cellular and regional specification of the neural tube. It has been reported earlier that members of the Distal-less homeobox gene family are specifically activated in distinct regions of the central nervous system (CNS) of Xenopus embryos (Dirksen et al., 1993; Papalopulu and Kintner, 1993). In this paper we describe in detail a Xenopus homeobox containing gene Xdll-2, which belongs to the Distal-less gene family. In contrast to other previously described Xenopus family members, Xdll-2 is expressed in the embryonic ectoderm and is specifically repressed in the CNS. This repression can be mimicked in isolated animal caps by treatment with activin. Expression of Xdll-2 persists in the epidermis and some neural crest cells. Because of its spatial and temporal expression pattern this gene is a good candidate to have a regulatory function in the initial formation of the epidermis. Its high level of expression in adult skin indicates that its function is continuously required in this tissue.