Teeth develop as epithelial appendages, and their morphogenesis is regulated by epithelial-mesenchymal interactions and conserved signaling pathways common to many developmental processes. A key event during tooth morphogenesis is the transition from bud to cap stage when the epithelial bud is divided into specific compartments distinguished by morphology as well as gene expression patterns. The enamel knot, a signaling center, forms and regulates the shape and size of the tooth. Mesenchymal signals are necessary for epithelial patterning and for the formation and maintenance of the epithelial compartments. We studied the expression of Notch pathway molecules during the bud-to-cap stage transition of the developing mouse tooth. Lunatic fringe expression was restricted to the epithelium, where it formed a boundary flanking the enamel knot. The Lunatic fringe expression domains overlapped only partly with the expression of Notch1 and Notch2, which were coexpressed with Hes1. We examined the regulation of Lunatic fringe and Hes1 in cultured explants of dental epithelium. The expression of Lunatic fringe and Hes1 depended on mesenchymal signals and both were positively regulated by FGF-10. BMP-4 antagonized the stimulatory effect of FGF-10 on Lunatic fringe expression but had a synergistic effect with FGF-10 on Hes1 expression. Recombinant Lunatic fringe protein induced Hes1 expression in the dental epithelium, suggesting that Lunatic fringe can act also extracellularly. Lunatic fringe mutant mice did not reveal tooth abnormalities, and no changes were observed in the expression patterns of other Fringe genes. We conclude that Lunatic fringe may play a role in boundary formation of the enamel knot and that Notch-signaling in the dental epithelium is regulated by mesenchymal FGFs and BMP.