Preplacodal ectoderm arises near the end of gastrulation as a narrow band of cells surrounding the anterior neural plate. This domain later resolves into discrete cranial placodes that, together with neural crest, produce paired sensory structures of the head. Unlike the better-characterized neural crest, little is known about early regulation of preplacodal development. Classical models of ectodermal patterning posit that preplacodal identity is specified by readout of a discrete level of Bmp signaling along a DV gradient. More recent studies indicate that Bmp-antagonists are critical for promoting preplacodal development. However, it is unclear whether Bmp-antagonists establish the proper level of Bmp signaling within a morphogen gradient or, alternatively, block Bmp altogether. To begin addressing these issues, we treated zebrafish embryos with a pharmacological inhibitor of Bmp, sometimes combined with heat shock-induction of Chordin and dominant-negative Bmp receptor, to fully block Bmp signaling at various developmental stages. We find that preplacodal development occurs in two phases with opposing Bmp requirements. Initially, Bmp is required before gastrulation to co-induce four transcription factors, Tfap2a, Tfap2c, Foxi1, and Gata3, which establish preplacodal competence throughout the nonneural ectoderm. Subsequently, Bmp must be fully blocked in late gastrulation by dorsally expressed Bmp-antagonists, together with dorsally expressed Fgf and Pdgf, to specify preplacodal identity within competent cells abutting the neural plate. Localized ventral misexpression of Fgf8 and Chordin can activate ectopic preplacodal development anywhere within the zone of competence, whereas dorsal misexpression of one or more competence factors can activate ectopic preplacodal development in the neural plate. Conversely, morpholino-knockdown of competence factors specifically ablates preplacodal development. Our work supports a relatively simple two-step model that traces regulation of preplacodal development to late blastula stage, resolves two distinct phases of Bmp dependence, and identifies the main factors required for preplacodal competence and specification.