A previous genetic analysis of a reporter gene carrying a 375-bp region from a dpp intron (dppMX-lacZ) revealed that the Wingless and Dpp pathways are required to activate dpp expression in posterior spiracle formation. Here we report that within the dppMX region there is an enhancer with binding sites for TCF and Mad that are essential for activating dppMX expression in posterior spiracles. There is also a binding site for Brinker likely employed to repress dppMX expression. This combinatorial enhancer may be the first identified with the ability to integrate temporally distinct positive (TCF and Mad) and negative (Brinker) inputs in the same cells. Cuticle studies on a unique dpp mutant lacking this enhancer showed that it is required for viability and that the Filzkorper are U-shaped rather than straight. Together with gene expression data from these mutants and from brk mutants, our results suggest that there are two rounds of Dpp signaling in posterior spiracle development. The first round is associated with dorsal-ventral patterning and is necessary for designating the posterior spiracle field. The second is governed by the combinatorial enhancer and begins during germ band retraction. The second round appears necessary for proper spiracle internal morphology and fusion with the remainder of the tracheal system. Intriguingly, several aspects of dpp posterior spiracle expression and function are similar to demonstrated roles for Wnt and BMP signaling in proximal-distal outgrowth of the mammalian embryonic lung.