In Drosophila, Decapentaplegic (Dpp) and Wingless (Wg) are two secreted signalling proteins of the transforming growth factor (TGF)-beta and Wnt families, respectively. Although both are often required during development, only a few downstream components of these signalling pathways have been described. Here we present evidence that in the embryonic midgut both signalling pathways control the subcellular localization of the homeodomain protein encoded by the extradenticle (exd) gene. Exd protein is predominantly nuclear in endoderm cells close to Dpp-and Wg-secreting cells of the visceral mesoderm, but is in the cytoplasm in more distant endoderm cells. Both dpp and wg are required for the nuclear localization of Exd in the endoderm, whereas ectopic expression of dpp and wg expands the domain of nuclear Exd. Furthermore, the nuclear import of Exd correlates with the transcription of an exd-dependent reporter gene in the endoderm. Thus one mechanism by which extracellular signals might control pattern is by directing the graded nuclear localization of homeodomain proteins such as Exd that directly control the expression of target genes.