Though much has been learned about the process of ovarian follicle maturation through studies of oogenesis in both vertebrate and invertebrate systems, less is known about how follicles form initially. In Drosophila, two somatic follicle stem cells (FSCs) in each ovariole give rise to all polar cells, stalk cells, and main body cells needed to form each follicle. We show that one daughter from each FSC founds most follicles but that cell type specification is independent of cell lineage, in contrast to previous claims of an early polar/stalk lineage restriction. Instead, key intercellular signals begin early and guide cell behavior. An initial Notch signal from germ cells is required for FSC daughters to migrate across the ovariole and on occasion to replace the opposite stem cell. Both anterior and posterior polar cells arise in region 2b at a time when approximately 16 cells surround the cyst. Later, during budding, stalk cells and additional polar cells are specified in a process that frequently transfers posterior follicle cells onto the anterior surface of the next older follicle. These studies provide new insight into the mechanisms that underlie stem cell replacement and follicle formation during Drosophila oogenesis.