Modulation of transcription factor activity leading to changes in cell behavior (e.g., differentiation versus proliferation) is one of the critical outcomes of receptor tyrosine kinase (RTK) stimulation. In the early Drosophila embryo, activation of the torso (tor) RTK at the poles of the embryo activates a phosphorylation cascade that leads to the spatially specific transcription of the tailless (tll) gene. Our analysis of the tor response element (tor-RE) in the tll promoter indicates that the key activity modulated by the tor RTK pathway is a repressor present throughout the embryo. We have mapped the tor-RE to an 11-bp sequence; using this sequence as the basis for protein purification, we have determined that the proteins GAGA and NTF-1 (also known as Elf-1, product of the grainyhead gene) bind to the tor-RE. We demonstrate that NTF-1 can be phosphorylated by MAPK (mitogen-activated protein kinase), and that tll expression is expanded in embryos lacking maternal NTF-1 activity; these results make NTF-1 a likely target for modulation by the tor RTK pathway in vivo. The data presented here support a model in which activation of the tor RTK at the poles of the embryos leads to inactivation of the repressor and therefore, to transcriptional activation (by activators present throughout the embryo) of the tll gene at the poles of the embryo.