Localized expression of decapentaplegic (dpp) is required for proper development of the Drosophila imaginal discs. Using genetic mosaics, we show that in the anterior compartment of appendage discs and anterior to the morphogenetic furrow in the eye disc, cells that lack cAMP-dependent protein kinase (PKA) activity ectopically express dpp. Pka- cells can influence the fate of neighboring cells to reorganize anterior patterns in appendages and trigger ectopic morphogenetic furrows in the developing retina. This organizing activity of Pka mutant cells depends on dpp activity. Our findings suggest that PKA is a component of a signaling pathway that represses dpp expression and that hh antagonizes this pathway to maintain dpp expression at the anterior-posterior compartment border and in the morphogenetic furrow.