Two homeobox genes NK-4/tinman and NK-3/bagpipe, which belong to the NK-2 class, play key roles in the development of the embryonic heart and visceral muscle of Drosophila. In our recent work, we have demonstrated that NK-4 can act as either a transcriptional activator or repressor and that for its transcriptional activities, NK-4 recruits the p300 coactivator and the Groucho corepressor, respectively. Remarkably, NK-3 represses transcription by recruiting a corepressor complex containing HIPK2, the Groucho corepressor and a histone deacetylase, HDAC1 that leads to histone modification on chromatin. We now show that Groucho is phosphorylated by HIPK2 in vitro and in vivo. Phosphorylation sites of Groucho are mapped to the serine- and proline-rich domain which serves as an interaction domain with sequence specific DNA binding factors. Mutations in the HIPK2 phosphorylation sites of Groucho affect the Groucho corepressor activity in cultured cells. Furthermore, phosphorylation of Groucho by HIPK2 inhibits protein-protein interactions between Groucho and NK-3. In transgenic flies, ectopic expression of wild type Groucho in the eye imaginal disc induces an eyeless phenotype. However, ectopic expression of mutant Groucho containing mutations in HIPK2 phosphorylation sites (Ser to Glu) results in the small eye phenotype which is similar to the phenotype generated by the ectopic expression of HIPK2. These results indicate that Groucho is a novel target for HIPK2 in vivo and suggest that HIPK2 plays a regulatory role in the formation of the corepressor complex recruited by NK-3. During the Drosophila cardiogenesis, NK-4 acts combinatorially with Pannier, a GATA factor. We show that NK-4 interacts with Pannier and synergistically activates the D-mef2 target gene. This synergy is inhibited by U-shape, a friend of GATA factor (FOG). Indeed, NK-4 directly interacts with Pannier, revealed by colocalization and coimmunoprecipitation experiments in cultured cells and in vitro pull-down assays. Using transgenic flies that harbor various truncated form of the NK-4 transgene, we define functional domains of NK-4 that are required for synergistic regulation of the D-mef2 differentiation gene in vivo. Together these results provide important insights into the genetic mechanisms controlling heart formation in the Drosophila model system.