The vertebrate midbrain consists of dorsal and ventral domains, the tectum and tegmentum, which execute remarkably different developmental programs. Tectal development is characterized by radial migration of differentiating neurons to form a laminar structure, while the tegmentum generates functionally diverse nuclei at characteristic positions along the neural axis. Here we show that neurons appearing early in the development of the tectum are characterized either by the expression of the POU-domain transcription factor Brn3.0, or by members of the Pax and LIM families. Early neurons of the rostral tegmentum co-express Brn3.0 and Lim1/2, and caudal tegmental neurons express Islet1/2. Notochord tissue or Shh-transfected epithelial cells, transplanted to the developing tectum, suppress the development of tectal neurons, and induce the differentiation of multiple tegmental cell types. The distance from the midbrain-hindbrain boundary (MHB) determines the specific markers expressed by the tegmental neurons induced in the tectum, and the transplantation of MHB tissue adjacent to the rostral tegmentum also induces caudal markers, demonstrating the role of MHB signals in determining the phenotype of these early midbrain neurons. Co-culture of isolated midbrain neuroepithelium with Shh-expressing cells demonstrates that Shh is sufficient to convert tectal neurons to a tegmental fate. In mice lacking Shh, Brn3.0- and Pax7-expressing neurons typical of the tectum develop throughout the ventral midbrain, and gene expression patterns characteristic of early tegmental development do not appear.