The Drosophila EGF receptor (DER) is activated by secreted Spitz to induce different cell fates in the ventral ectoderm. Processing of the precursor transmembrane Spitz to generate the secreted form was shown to be the limiting event, but the cells in which processing takes place and the mechanism that may generate a gradient of secreted Spitz in the ectoderm were not known. The ectodermal defects in single minded (sim) mutant embryos, in which the midline fails to develop, suggested that the midline cells contribute to patterning of the ventral ectoderm. This work shows that the midline provides the site for Spitz expression and processing. The Rhomboid and Star proteins are also expressed and required in the midline. The ectodermal defects of spitz, rho or Star mutant embryos could be rescued by inducing the expression of the respective normal genes only in the midline cells. Rho and Star thus function non-autonomously, and may be required for the production or processing of the Spitz precursor. Secreted Spitz is the only sim-dependent contribution of the midline to patterning the ectoderm, since the ventral defects observed in sim mutant embryos can be overcome by expression of secreted Spitz in the ectoderm. While ectopic expression of secreted Spitz in the ectoderm or mesoderm gave rise to ventralization of the embryo, increased expression of secreted Spitz in the midline did not lead to alterations in ectoderm patterning. A mechanism for adjustment to variable levels of secreted Spitz emanating from the midline may be provided by Argos, which forms an inhibitory feedback loop for DER activation. The production of secreted Spitz in the midline, may provide a stable source for graded DER activation in the ventral ectoderm.