Photoreceptor differentiation in the Drosophila eye disc progresses from posterior to anterior in a wave driven by the Hedgehog and Decapentaplegic signals. Cells mutant for the hyperplastic discs gene misexpress both of these signaling molecules in anterior regions of the disc, leading to premature photoreceptor differentiation and overgrowth of surrounding tissue. The two genes are independently regulated by hyperplastic discs; decapentaplegic can still be misexpressed in cells mutant for both hyperplastic discs and hedgehog, and a repressor form of the transcription factor Cubitus interruptus can block decapentaplegic misexpression but not hedgehog misexpression. Loss of hyperplastic discs causes the accumulation of full-length Cubitus interruptus protein, but not of Smoothened, in both the eye and wing discs. hyperplastic discs encodes a HECT domain E3 ubiquitin ligase that is likely to act by targeting Cubitus interruptus and an unknown activator of hedgehog expression for proteolysis.