The capacity of stem cells to self renew and the ability of stem cell daughters to differentiate into highly specialized cells depend on external cues provided by their cellular microenvironments [1-3]. However, how microenvironments are shaped is poorly understood. In testes of Drosophila melanogaster, germ cells are enclosed by somatic support cells. This physical interrelationship depends on signaling from germ cells to the Epidermal growth factor receptor (Egfr) on somatic support cells . We show that germ cells signal via the Egf class ligand Spitz (Spi) and provide evidence that the Egfr associates with and acts through the guanine nucleotide exchange factor Vav to regulate activities of Rac1. Reducing activity of the Egfr, Vav, or Rac1 from somatic support cells enhanced the germ cell enclosure defects of a conditional spi allele. Conversely, reducing activity of Rho1 from somatic support cells suppressed the germ cell enclosure defects of the conditional spi allele. We propose that a differential in Rac and Rho activities across somatic support cells guides their growth around the germ cells. Our novel findings reveal how signals from one cell type regulate cell-shape changes in another to establish a critical partnership required for proper differentiation of a stem cell lineage.