The Drosophila BMP homolog DPP can function as a morphogen, inducing multiple cell fates across a developmental field. However, it is unknown how graded levels of extracellular DPP are interpreted to organize a sharp boundary between different fates. Here we show that opposing DPP and EGF signals set the boundary for an ovarian follicle cell fate. First, DPP regulates gene expression in the follicle cells that will create the operculum of the eggshell. DPP induces expression of the enhancer trap reporter A359 and represses expression of bunched, which encodes a protein similar to the mammalian transcription factor TSC-22. Second, DPP signaling indirectly regulates A359 expression in these cells by downregulating expression of bunched. Reduced bunched function restores A359 expression in cells that lack the Smad protein MAD; ectopic expression of BUNCHED suppresses A359 expression in this region. Importantly, reduction of bunched function leads to an expansion of the operculum and loss of the collar at its boundary. Third, EGF signaling upregulates expression of bunched. We previously demonstrated that the bunched expression pattern requires the EGF receptor ligand GURKEN. Here we show that activated EGF receptor is sufficient to induce ectopic bunched expression. Thus, the balance of DPP and EGF signals sets the boundary of bunched expression. We propose that the juxtaposition of cells with high and low BUNCHED activity organizes a sharp boundary for the operculum fate.