The Drosophila signaling factor decapentaplegic (dpp) mediates the effects of hedgehog (hh) in tissue patterning by regulating the expression of tissue-specific genes. In the eye disc, the transcription factors eyeless (ey), eyes absent (eya), sine oculis (so) and dachshund (dac) participate with these signaling molecules in a complex regulatory network that results in the initiation of eye development. Our analysis of functional relationships in the early eye disc indicates that hh and dpp play no role in regulating ey, but are required for eya, so and dac expression. We show that restoring expression of eya in loss-of-function dpp mutant backgrounds is sufficient to induce so and dac expression and to rescue eye development. Thus, once expressed, eya can carry out its functions in the absence of dpp. These experiments indicate that dpp functions downstream of or in parallel with ey, but upstream of eya, so and dac. Additional control is provided by a feedback loop that maintains expression of eya and so and includes dpp. The fact that exogenous overexpression of ey, eya, so and dac interferes with wild-type eye development demonstrates the importance of such a complicated mechanism for maintaining proper levels of these factors during early eye development. Whereas initiation of eye development fails in either Hh or Dpp signaling mutants, the subsequent progression of the morphogenetic furrow is only slowed down. However, we find that clones that are simultaneously mutant for Hh and Dpp signaling components completely block furrow progression and eye differentiation, suggesting that Hh and Dpp serve partially redundant functions in this process. Interestingly, furrow-associated expression of eya, so and dac is not affected by double mutant tissue, suggesting that some other factor(s) regulates their expression during furrow progression.