We describe the characterization of the Drosophila gene, corkscrew (csw), which is maternally required for normal determination of cell fates at the termini of the embryo. Determination of terminal cell fates is mediated by a signal transduction pathway that involves a receptor tyrosine kinase, torso, a serine/threonine kinase, D-raf, and the transcription factors, tailless and huckebein. Double mutant and cellular analyses between csw, torso, D-raf, and tailless indicate that csw acts downstream of torso and in concert with D-raf to positively transduce the torso signal via tailless, to downstream terminal genes. The csw gene encodes a putative nonreceptor protein tyrosine phosphatase covalently linked to two N-terminal SH2 domains, which is similar to the mammalian PTP1C protein.