Inductive interactions between germ layers are an essential feature of the development of many organisms. In several species these interactions are mediated by members of the transforming growth factor-beta (TGF beta) family. In amphibians, different concentrations of activin can induce different types of mesoderm in the animal cap assay. In Drosophila, a member of the TGF beta family, decapentaplegic (dpp), acts as an inductive signal. Midway through embryogenesis, dpp is expressed in the visceral mesoderm, and enhances the expression of the homeotic gene labial in the underlying midgut endoderm. Earlier in development, however, dpp expression is limited to the dorsal ectoderm. At this stage in development, thickveins, a dpp receptor, is expressed in the mesoderm, and this suggests that ectodermal dpp might not only be required for development of dorsal ectoderm, but could also act inductively to mediate pattern formation in the underlying mesoderm. Here we show, by expressing dpp ectopically in the ectoderm and mesoderm and by examining dpp null mutant embryos, that dpp regulates expression of mesodermal genes.