Inductive signals across germ layers are important for the development of the endoderm in vertebrates and invertebrates (Tam, P.P., M. Kanai-Azuma, and Y. Kanai. 2003. Curr. Opin. Genet. Dev. 13:393-400; Nakagoshi, H. 2005. Dev. Growth Differ. 47:383-392). In fl ies, the visceral mesoderm secretes signaling molecules that diffuse into the underlying midgut endoderm, where conserved signaling cascades activate the Hox gene labial , which is important for the differentiation of copper cells (Bienz, M. 1997. Curr. Opin. Genet. Dev. 7:683-688). We present here a Drosophila melanogaster gene of the Fox family of transcription factors, FoxK , that mediates transforming growth factor β (TGF-β) signaling in the embryonic midgut endoderm. FoxK mutant embryos fail to generate midgut constrictions and lack Labial in the endoderm. Our observations suggest that TGF-β signaling directly regulates FoxK through functional Smad/Madbinding sites, whereas FoxK, in turn, regulates labial expression. We also describe a new cooperative activity of the transcription factors FoxK and Dfos/AP-1 that regulates labial expression in the midgut endoderm. This regulatory activity does not require direct labial activation by the TGF-β effector Mad. Thus, we propose that the combined activity of the TGF-β target genes FoxK and Dfos is critical for the direct activation of lab in the endoderm.