Signaling from the EGF receptor (EGFR) can trigger the differentiation of a wide variety of cell types in many animal species. We have explored the mechanisms that generate this diversity using the Drosophila peripheral nervous system. In this context, Spitz (SPI) ligand can induce two alternative cell fates from the dorsolateral ectoderm: chordotonal sensory organs and non-neural oenocytes. We show that the overall number of both cell types that are induced is controlled by the degree of EGFR signaling. In addition, the spalt (sal) gene is identified as a critical component of the oenocyte/chordotonal fate switch. Genetic and expression analyses indicate that the SAL zinc-finger protein promotes oenocyte formation and supresses chordotonal organ induction by acting both downstream and in parallel to the EGFR. To explain these findings, we propose a prime-and-respond model. Here, sal functions prior to signaling as a necessary but not sufficient component of the oenocyte prepattern that also serves to raise the apparent threshold for induction by SPI. Subsequently, sal-dependent SAL upregulation is triggered as part of the oenocyte-specific EGFR response. Thus, a combination of SAL in the responding nucleus and increased SPI ligand production sets the binary cell-fate switch in favour of oenocytes. Together, these studies help to explain how one generic signaling pathway can trigger the differentiation of two distinct cell types.