The Drosophila endoderm segregates into three non-neural cell types, the principle midgut epithelial cells, the adult midgut precursors, and the interstitial cell precursors, early in development. We show that this process occurs in the absence of mesoderm and requires proneural and neurogenic genes. In neurogenic mutants the principle midgut epithelial cells are missing and the other two cell types develop in great excess. Consequently, the midgut epithelium does not form. In achaete-scute complex and daughterless mutants the interstitial cell precursors do not develop and the number of adult midgut precursors is strongly reduced. Development of the principle midgut epithelial cells and formation of the midgut epithelium is restored in neurogenic proneural double mutants. The neurogenic/proneural genes are, in contrast to the neuroectoderm, not expressed in small clusters of cells but initially homogeneously in the endoderm suggesting that no prepattern exists which determines the position of the segregating cells. Hence, the segregation pattern solely depends on neurogenic/proneural gene interaction. Proneural genes are required but not sufficient to determine specific cell fates because they are required for cell type specification in both ectoderm and endoderm. Our data also suggest that the neurogenic/proneural genes are involved in the choice between epithelial versus mesenchymal cell morphologies.