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 flies, 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 beta (TGF-beta) 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-beta signaling directly regulates FoxK through functional Smad/Mad-binding 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-beta effector Mad. Thus, we propose that the combined activity of the TGF-beta target genes FoxK and Dfos is critical for the direct activation of lab in the endoderm.