Background: Xenorhabdus innexi is a bacterial symbiont of Steinernema scapterisci nematodes, which is a cricket-specialist parasite and together the nematode and bacteria infect and kill crickets. Curiously, X. innexi expresses a potent extracellular mosquitocidal toxin activity in culture supernatants. We sequenced a draft genome of X. innexi and compared it to the genomes of related pathogens to elucidate the nature of specialization. Results: Using green fluorescent protein-expressing X. innexi we confirm previous reports using culture-dependent techniques that X. innexi colonizes its nematode host at low levels (similar to 3-8 cells per nematode), relative to other Xenorhabdus-Steinernema associations. We found that compared to the well-characterized entomopathogenic nematode symbiont X. nematophila, X. innexi fails to suppress the insect phenoloxidase immune pathway and is attenuated for virulence and reproduction in the Lepidoptera Galleria mellonella and Manduca sexta, as well as the dipteran Drosophila melanogaster. To assess if, compared to other Xenorhabdus spp., X. innexi has a reduced capacity to synthesize virulence determinants, we obtained and analyzed a draft genome sequence. We found no evidence for several hallmarks of Xenorhabdus spp. toxicity, including Tc and Mcf toxins. Similar to other Xenorhabdus genomes, we found numerous loci predicted to encode non-ribosomal peptide/polyketide synthetases. Anti-SMASH predictions of these loci revealed one, related to the fcl locus that encodes fabclavines and zmn locus that encodes zeamines, as a likely candidate to encode the X. innexi mosquitocidal toxin biosynthetic machinery, which we designated Xlt. In support of this hypothesis, two mutants each with an insertion in an Xlt biosynthesis gene cluster lacked the mosquitocidal compound based on HPLC/MS analysis and neither produced toxin to the levels of the wild type parent. Conclusions: The X. innexi genome will be a valuable resource in identifying loci encoding new metabolites of interest, but also in future comparative studies of nematode-bacterial symbiosis and niche partitioning among bacterial pathogens.