The Smad proteins have been implicated in the intracellular signaling of transforming growth factor-beta (TGF-beta) ligands. Here we describe the function of Smad5 in early Xenopus development. Misexpression of Smad5 in the embryo causes ventralization and induces ventral mesoderm. Moreover, Smad5 induces epidermis in dissociated ectoderm cells which would otherwise form neural tissue. Both of these activities require Smad4 (DPC4) activity. We propose that Smad5 acts downstream of the BMP4 signaling pathway in Xenopus embryos and directs the formation of ventral mesoderm and epidermis.