The scalloped and vestigial genes are both required for the formation of the Drosophila wing, and recent studies have indicated that they can function as a heterodimeric complex to regulate the expression of downstream target genes. We have analyzed the consequences of complete loss of scalloped function, ectopic expression of scalloped, and ectopic expression of vestigial on the development of the Drosophila wing imaginal disc. Clones of cells mutant for a strong allele of scalloped fail to proliferate within the wing pouch, but grow normally in the wing hinge and notum. Cells overexpressing scalloped fail to proliferate in both notal and wing-blade regions of the disc, and this overexpression induces apoptotic cell death. Clones of cells overexpressing vestigial grow smaller or larger than control clones, depending upon their distance from the dorsal-ventral compartment boundary. These studies highlight the importance of correct scalloped and vestigial expression levels to normal wing development. Our studies of vestigial-overexpressing clones also reveal two further aspects of wing development. First, in the hinge region vestigial exerts both a local inhibition and a long-range induction of wingless expression. These and other observations imply that vestigial-expressing cells in the wing blade organize the development of surrounding wing-hinge cells. Second, clones of cells overexpressing vestigial exhibit altered cell affinities. Our analysis of these clones, together with studies of scalloped mutant clones, implies that scalloped- and vestigial-dependent cell adhesion contributes to separation of the wing blade from the wing hinge and to a gradient of cell affinities along the dorsal-ventral axis of the wing.