Rows of cells that flank the parasegment boundary make up a signaling center within the epidermis of the Drosophila embryo. Signals emanating from these cells, encoded by hedgehog (hh) and wingless (wg), are shown to be required for all segment pattern dorsally. Wg activity is required for the differentiation of one cell type, constituting half the parasegment. The gene lines appears to act in parallel to the Wg pathway in the elaboration of this cell type. Hh activity is responsible for three other cell types in the parasegment. Some cell types are specified as Hh activity and interfere with the function of patched, analogous to patterning of imaginal discs. However, some pattern is independent of the antagonism of patched by Hh, and relies instead on novel interactions with lines. Lastly, we provide evidence that decapentaplegic does not mediate patterning by Hh in the dorsal epidermis.