Dorsal mesoderm induction in arthropods and ventral mesoderm induction in vertebrates are closely related processes that involve signals of the BMP family. In Drosophila, induction of visceral mesoderm, dorsal muscles, and the heart by Dpp is, at least in part, effected through the transcriptional activation and function of the homeobox gene tinman in dorsal mesodermal cells during early embryogenesis. Here we present a functional dissection of atinman enhancer that mediates the Dpp response. We provide evidence that mesoderm-specific induction of tinman requires the binding of both activators and repressors. Screens for binding factors yielded Tinman itself and the Smad4 homolog Medea. We show that the binding and synergistic activities of Smad and Tinman proteins are critical for mesodermal tinman induction, whereas repressor binding sites prevent induction in the dorsal ectoderm and amnioserosa. Thus, integration of positive and negative regulators on enhancers of target genes appears to be an important mechanism in tissue-specific induction by TGF-β molecules.