At gastrulation, vertebrate ectoderm is competent to differentiate into either neural tissue or epidermis. Several soluble factors that can neuralize ectoderm in explant cultures have been isolated. Alternatively, neuralization can be achieved by dissociating the cells of the blastula ectoderm. These various treatments appear to neuralize by blocking or diluting out the action of an epidermal-inducing factor. Recent results demonstrate that bone morphogenetic protein 4 (BMP-4), a member of the transforming growth factor beta (TGF-beta) ligand superfamily, is a potent neural inhibitor and epidermal inducer and may represent the endogenous epidermal-inducing factor.