Here we describe our analyses of Rhino, a novel member of the Heterochromatin Protein 1(HP1) subfamily of chromo box proteins. rhino (rhi) is expressed only in females and chiefly in the germline, thus providing a new tool to dissect the role of chromo-domain proteins in development. Mutations in rhi disrupt eggshell and embryonic patterning and arrest nurse cell nuclei during a stage-specific reorganization of their polyploid chromosomes, a mitotic-like state called the "five-blob" stage. These visible alterations in chromosome structure do not affect polarity by altering transcription of key patterning genes. Expression levels of gurken (grk), oskar (osk), bicoid (bcd), and decapentaplegic (dpp) transcripts are normal, with a slight delay in the appearance of bcd and dpp mRNAs. Mislocalization of grk and osk transcripts, however, suggests a defect in the microtubule reorganization that occurs during the middle stages of oogenesis and determines axial polarity. This defect likely results from aberrant Grk/Egfr signaling at earlier stages, since rhi mutations delay synthesis of Grk protein in germaria and early egg chambers. In addition, Grk protein accumulates in large, actin-caged vesicles near the endoplasmic reticulum of stages 6-10 egg chambers. We propose two hypotheses to explain these results. First, Rhi may play dual roles in oogenesis, independently regulating chromosome compaction in nurse cells at the end of the unique endoreplication cycle 5 and repressing transcription of genes that inhibit Grk synthesis. Thus, loss-of-function mutations arrest nurse cell chromosome reorganization at the five-blob stage and delay production or processing of Grk protein, leading to axial patterning defects. Second, Rhi may regulate chromosome compaction in both nurse cells and oocyte. Loss-of-function mutations block nurse cell nuclear transitions at the five-blob stage and activate checkpoint controls in the oocyte that arrest Grk synthesis and/or inhibit cytoskeletal functions. These functions may involve direct binding of Rhi to chromosomes or may involve indirect effects on pathways controlling these processes.