Differentiation of the Drosophila retina occurs as a morphogenetic furrow sweeps anteriorly across the eye imaginal disc, driven by Hedgehog secretion from photoreceptor precursors differentiating behind the furrow. A BTB protein, Roadkill, is expressed posterior to the furrow and targets the Hedgehog signal transduction component Cubitus interruptus for degradation by Cullin-3 and the proteosome. Clonal analysis and conditional mutant studies establish that roadkill transcription is activated by the EGF receptor and Ras pathway in most differentiating retinal cells, and by both EGF receptor/Ras and by Hedgehog signaling in cells that remain unspecified. These findings outline a circuit by which Hedgehog signal transduction is modified as Hedgehog signaling initiates retinal differentiation. A model is presented for regulation of the Cullin-3 and Cullin-1 pathways that modifies Hedgehog signaling as the morphogenetic furrow moves and the responses of retinal cells change.