CORL proteins (FUSSEL/SKOR proteins in humans) are related to Sno/Ski oncogenes but their developmental roles are unknown. We have cloned Drosophila CORL and show that its expression is restricted to distinct subsets of cells in the central nervous system. We generated a deletion of CORL and noted that homozygous individuals rarely survive to adulthood. Df(4)dCORL adult escapers display mushroom body (MB) defects and Df(4)dCORL larvae are lacking Ecdysone Receptor (EcR-B1) expression in MB neurons. This is phenocopied in CORL-RNAi and Smad2-RNAi clones in wild-type larvae. Furthermore, constitutively active Baboon (type I receptor upstream of Smad2) cannot stimulate EcR-B1 MB expression in Df(4)dCORL larvae, which demonstrates a formal requirement for CORL in Smad2 signaling. Studies of mouse Corl1 (Skor1) revealed that it binds specifically to Smad3. Overall, the data suggest that CORL facilitates Smad2 activity upstream of EcR-B1 in the MB. The conservation of neural expression and strong sequence homology of all CORL proteins suggests that this is a new family of Smad co-factors.