Association and relay neurons that are generated in the dorsal spinal cord play essential roles in transducing somatosensory information. During development, these two major neuronal classes are delineated by the expression of the homeodomain transcription factor Lbx1. Lbx1 is expressed in and required for the correct specification of three early dorsal interneuron populations and late-born neurons that form the substantia gelatinosa. In mice lacking Lbx1, cells types that arise in the ventral alar plate acquire more dorsal identities. This results in the loss of dorsal horn association interneurons, excess production of commissural neurons, and disrupted sensory afferent innervation of the dorsal horn. Lbx1, therefore, plays a critical role in the development of sensory pathways in the spinal cord that relay pain and touch.