Signals from transforming growth factor-beta (TGF-beta) ligands are transmitted within the cell by members of the Smad family, which can be grouped into three classes based on sequence similarities. Our previous identification of both class I and II Smads functioning in a single pathway in C. elegans, raised the issue of whether the requirement for Smads derived from different classes is a general feature of TGF-beta signaling. We report here the identification of a new Drosophila class II Smad, Medea, a close homolog of the human tumor-suppressor gene DPC4. Embryos from germline clones of both Medea and Mad (a class I Smad) are ventralized, as are embryos null for the TGF-beta-like ligand decapentaplegic (dpp). Loss of Medea also blocks dpp signaling during later development, suggesting that Medea, like Mad, is universally required for dpp signaling. Furthermore, we show that the necessity for these two closely related, non-redundant Smads, is due to their different signaling properties - upon activation of the Dpp pathway, Mad is required to actively translocate Medea into the nucleus. These results provide a paradigm for, and distinguish between, the requirement for class I and II Smads in Dpp/BMP signaling.