The Drosophila BMP homolog DPP can function as a morphogen, inducing multip
le cell fates across a developmental field. However, it is unknown how grad
ed levels of extracellular DPP are interpreted to organize a sharp boundary
between different fates. Here we show that opposing DPP and EGF signals se
t the boundary for an ovarian follicle cell fate. First, DPP regulates gene
expression in the follicle cells that will create the operculum of the egg
shell. DPP induces expression of the enhancer trap reporter A359 and repres
ses expression of bunched, which encodes a protein similar to the mammalian
transcription factor TSC-22. Second, DPP signaling indirectly regulates A3
59 expression in these cells by downregulating expression of bunched, Reduc
ed bunched function restores A359 expression in cells that lack the Smad pr
otein MAD; ectopic expression of BUNCHED suppresses A359 expression in this
region. Importantly, reduction of bunched function leads to an expansion o
f the operculum and loss of the collar at its boundary. Third, EGF signalin
g upregulates expression of bunched. We previously demonstrated that the bu
nched expression pattern requires the EGF receptor ligand GURKEN, Here we s
how that activated EGF receptor is sufficient to induce ectopic bunched exp
ression. Thus, the balance of DPP and EGF signals sets the boundary of bunc
hed expression. We propose that the juxtaposition of cells with high and lo
w BUNCHED activity organizes a sharp boundary for the operculum fate.