Gradients of morphogens determine cell fates by specifying discrete thresholds of gene activities. In the Drosophila embryo, a BMP gradient subdivides the dorsal ectoderm into amnioserosa and dorsal epidermis, and also inhibits neuroectoderm formation. A number of genes are differentially expressed in response to the gradient, but how their borders of expression are established is not well understood. We present evidence that the BMP gradient, via the Smads, provides a two-fold input in regulating the amnioserosa-specific target genes such as Race. Peak levels of Smads in the presumptive amnioserosa set the expression domain of zen, and then Smads act in combination with Zen to directly activate Race. This situation resembles a feed-forward mechanism of transcriptional regulation. In addition, we demonstrate that ectopically expressed Zen can activate targets like Race in the presence of low level Smads, indicating that the role of the highest activity of the BMP gradient is to activate zen.