Insights into Bone morphogenetic protein (Bmp) functions during forebrain development have been limited by a lack of Bmp signaling readouts. Here we used a novel Bmp signaling reporter ("BRE-gal" mice) to study Bmp signaling in the dorsal telencephalon. At early stages, BRE-gal expression was restricted to the dorsal telencephalic midline. At later stages, strong BRE-gal expression occurred in neurons of the marginal zone and dentate gyrus. Comparisons to nuclear phospho-Smad1/5/8 (pSmad) and Msx1 indicated that BRE-gal expression occurred exclusively in neural cells with high-level Bmp signaling. BRE-gal responsiveness to Bmps was confirmed in reporter-negative cortical cells cultured with Bmp4, and both in vivo and in vitro, BRE-gal expression was switch-like, or ultrasensitive. In the early dorsal telencephalon, BRE-gal expression negatively correlated with the cortical selector gene Lhx2, indicating a BRE-gal expression border that coincides with the cortex-hem boundary. However, in Lhx2 null chimeras, neither BRE-gal nor nuclear pSmad increases were observed in ectopic hem cells. These findings establish BRE-gal as an ultrasensitive reporter of Bmp signaling in the dorsal telencephalon, imply that hem fate can be specified at different Bmp signaling intensities, and suggest that Lhx2 primarily regulates the responses to--rather than the intensity of--Bmp signaling in dorsal telencephalic cells.