During embryonic development, a number of genetic cues act to generate neuronal diversity. While intrinsic transcriptional cascades are well-known to control neuronal sub-type cell fate, the target cells can also provide critical input to specific neuronal cell fates. Such signals, denoted retrograde signals, are known to provide critical survival cues for neurons, but have also been found to trigger terminal differentiation of neurons. One salient example of such target-derived instructive signals pertains to the specification of the Drosophila FMRFamide neuropeptide neurons, the Tv4 neurons of the ventral nerve cord. Tv4 neurons receive a BMP signal from their target cells, which acts as the final trigger to activate the FMRFa gene. A recent FMRFa-eGFP genetic screen identified several genes involved in Tv4 specification, two of which encode components of the U5 subunit of the spliceosome: brr2 (l(3) 72Ab) and Prp8. In this study, we focus on the role of RNA processing during target- derived signaling. We found that brr2 and Prp8 play crucial roles in controlling the expression of the FMRFa neuropeptide specifically in six neurons of the VNC (Tv4 neurons). Detailed analysis of brr2 revealed that this control is executed by two independent mechanisms, both of which are required for the activation of the BMP retrograde signaling pathway in Tv4 neurons: (1) Proper axonal pathfinding to the target tissue in order to receive the BMP ligand. (2) Proper RNA splicing of two genes in the BMP pathway: the thickveins (tkv) gene, encoding a BMP receptor subunit, and the Medea gene, encoding a co-Smad. These results reveal involvement of specific RNA processing in diversifying neuronal identity within the central nervous system.