The Drosophila salivary gland is a simple tubular organ derived from a contiguous epithelial primordium, which is established by the activities of the homeodomain-containing proteins Sex combs reduced (SCR), Extradenticle (EXD), and Homothorax (HTH). EGF signaling along the ventral midline specifies the salivary duct fate for cells in the center of the primordium, while cells farther away from the source of EGF signal adopt a secretory cell fate. EGF signaling works, at least in part, by repressing expression of secretory cell genes in the duct primordium, including fork head (fkh), which encodes a winged-helix transcription factor. FKH, in turn, represses trachealess (trh), a duct-specific gene initially expressed throughout the salivary gland primordium. trh encodes a basic helix-loop-helix PAS-domain containing transcription factor that has been proposed to specify the salivary duct fate. In conflict with this model, we find that three genes, dead ringer (dri), Serrate (Ser), and trh itself, are expressed in the duct independently of trh. Expression of all three duct genes is repressed in the secretory cells by FKH. We also show that SER in the duct cells signals to the adjacent secretory cells to specify a third cell type, the imaginal ring cells. Thus, localized EGF- and Notch-signaling transform a uniform epithelial sheet into three distinct cell types. In addition, Ser directs formation of actin rings in the salivary duct.