In Drosophila, a wave of differentiation progresses across the retinal field in response to signals from posterior cells. Hedgehog (Hh), Decapentaplegic (Dpp) and Notch (N) signaling all contribute. Clones of cells mutated for receptors and nuclear effectors of one, two or all three pathways were studied to define systematically the necessary and sufficient roles of each signal. Hh signaling alone was sufficient for progressive differentiation, acting through both the transcriptional activator Ci155 and the Ci75 repressor. In the absence of Ci, Dpp and Notch signaling together provided normal differentiation. Dpp alone sufficed for some differentiation, but Notch was not sufficient alone and acted only to enhance the effect of Dpp. Notch acted in part through downregulation of Hairy; Hh signaling downregulated Hairy independently of Notch. One feature of this signaling network is to limit Dpp signaling spatially to a range coincident with Hh.