The twisted gastrulation (tsg) gene is one of seven known zygotic genes that specify the fate of dorsal cells in Drosophila embryos. Mutations in these genes cause at least some of the cells on the dorsal half of the embryo to adopt more ventral cell fates leading to the proposal that most of these genes participate in establishing, maintaining, or modulating a gradient of a single signaling molecule DECAPENTAPLEGIC (DPP). We have examined the effects of tsg mutations on the development of cuticule elements, expression of a region specific enhancer trap, and patterns of mitotic domains. Mutations of tsg only affect the fate of a narrow strip of dorsal midline cells and do not affect dorsal ectoderm cells. However, the pattern of tsg expression is not coincident with the territories affected by tsg mutations. Structural analysis of the tsg gene reveals features of a secreted protein suggesting an extracellular site of action. The TSG protein bears a weak resemblance to human connective tissue growth factor (CTGF), a TGF-beta-induced protein. We propose that dorsal midline cell fate is specified by the combination of both a TSG and a DPP signal to which the dorsal midline cells are uniquely competent to respond.