The dorsal median cells are unique mesodermal cells that reside on the surface of the ventral nerve cord in the Drosophila embryo. The Buttonless homeodomain protein is specifically expressed in these cells and is required for their differentiation. We have determined that proper buttonless gene expression and dorsal median cell differentiation requires signals from underlying CNS midline cells. Thus, dorsal median cells fail to form in single-minded mutants and do not persist in slit mutants. Through analysis of rhomboid mutants and targeted rhomboid expression, we also show that the EGF signaling pathway regulates the number of both the dorsal median cells, as well as a set of mesodermal cells that arise next to the midline and express the single-minded gene. Finally, wingless-patched double mutants exhibit defects in the restriction of dorsal median cells to segment boundaries and alterations in CNS midline cell fates. Taken together, these data define a novel neuroectoderm to mesoderm signaling pathway and suggest that unique mesodermal cell types are specified by a combination of midline and segmental cues.