During animal development, accurate control of tissue specification and growth are critical to generate organisms of reproducible shape and size. The eye-antennal disc epithelium of Drosophila is a powerful model system to identify the signaling pathway and transcription factors that mediate and coordinate these processes. We show here that the Yorkie (Yki) pathway plays a major role in tissue specification within the developing fly eye disc epithelium at a time when organ primordia and regional identity domains are specified. RNAi-mediated inactivation of Yki, or its partner Scalloped (Sd), or increased activity of the upstream negative regulators of Yki cause a dramatic reorganization of the eye disc fate map leading to specification of the entire disc epithelium into retina. On the contrary, constitutive expression of Yki suppresses eye formation in a Sd-dependent fashion. We also show that knockdown of the transcription factor Homothorax (Hth), known to partner Yki in some developmental contexts, also induces an ectopic retina domain, that Yki and Scalloped regulate Hth expression, and that the gain-of-function activity of Yki is partially dependent on Hth. Our results support a critical role for Yki- and its partners Sd and Hth--in shaping the fate map of the eye epithelium independently of its universal role as a regulator of proliferation and survival.