Bolwig's organ is the larval light-sensing system consisting of 12 photoreceptors and its development requires atonal activity. Here, we showed that Bolwig's organ formation and atonal expression are controlled by the concerted function of hedgehog, eyes absent and sine oculis. Bolwig's organ primordium was first detected as a cluster of about 14 Atonal-positive cells at the posterior edge of the ocular segment in embryos and hence, atonal expression may define the region from which a few Atonal-positive founder cells (future primary photoreceptor cells) are generated by lateral specification. In Bolwig's organ development, neural differentiation precedes photoreceptor specification, since Elav, a neuron-specific antigen, whose expression is under the control of atonal, is expressed in virtually all early-Atonal-positive cells prior to the establishment of founder cells. Neither Atonal expression nor Bolwig's organ formation occurred in the absence of hedgehog, eyes absent or sine oculis activity. Genetic and histochemical analyses indicated that (1) responsible Hedgehog signals derive from the ocular segment, (2) Eyes absent and Sine oculis act downstream of or in parallel with Hedgehog signaling and (3) the Hedgehog signaling pathway required for Bolwig's organ development is a new type and lacks Fused kinase and Cubitus interruptus as downstream components.