Cytokines of the TGF beta superfamily regulate many aspects of cellular function by activating receptor complexes consisting of two distantly related serine/threonine kinases. Previous studies have indicated that Drosophila dpp uses similar signaling complexes and strictly requires the punt and thick veins receptors to transduce the signal across the membrane. Here, we show that the schnurri (shn) gene is required for many aspects of dpp signaling. Genetic epistasis experiments indicate that shn functions downstream of the dpp signal and its receptors. The shn gene encodes a large protein similar to a family of mammalian zinc finger transcription factors. The shn protein might therefore act as a nuclear target in the dpp signaling pathway directly regulating the expression of dpp-responsive genes.