Sip1, a Smad-binding zinc-finger homeodomain transcription factor, has essential functions in embryonic development, but its role in individual tissues and the significance of its interaction with Smad proteins have not been fully characterized. In the lens lineage, Sip1 expression is activated after lens placode induction, and as the lens develops, the expression is localized in the lens epithelium and bow region where immature lens fibers reside. The lens-lineage-specific inactivation of the Sip1 gene was performed using mice homozygous for floxed Sip1 that carry a lens-specific Cre recombinase gene. This caused the development of a small hollow lens connected to the surface ectoderm, identifying two Sip1-dependent steps in lens development. The persistence of the lens stalk resembles a defect in Foxe3 mutant mice, and Sip1-defective lenses lose Foxe3 expression, placing Foxe3 downstream of Sip1. In the Sip1-defective lens, beta-crystallin-expressing immature lens fiber cells were produced, but gamma-crystallin-expressing mature fiber cells were absent, indicating the requirement for Sip1 activity in lens fiber maturation. A 6.2 kb Foxe3 promoter region controlled lacZ transgene expression in the developing lens, where major and minor lens elements were identified upstream of -1.26 kb. Using transfection assays, the Foxe3 promoter was activated by Sip1 and this activation is further augmented by Smad8 in the manner dependent on the Smad-binding domain of Sip1. This Sip1-dependent activation and its augmentation by Smad8 occur using the proximal 1.26 kb promoter, and are separate from lens-specific regulation. This is the first demonstration of the significance of Smad interaction in modulating Sip1 activity.