The fate of the R7 photoreceptor cell in the Drosophila compound eye is established by a specific inductive interaction between the R8 photoreceptor neuron and the R7 precursor cell. This induction is mediated by two cell-surface proteins: the ligand, bride of sevenless (boss), and sevenless (sev), a tyrosine-kinase receptor. The structure of boss is unique for a ligand of a tyrosine-kinase receptor. It contains a large extracellular domain, seven transmembrane segments, and a carboxy-terminal cytoplasmic tail. Here we report that: (1) boss activates tyrosine phosphorylation of the sev receptor; (2) the seven transmembrane domain of boss is necessary for its function; and (3) a soluble form of boss acts as an antagonist of the sev receptor both in vivo and in vitro.