We describe here the role of the transcription factors encoding genes tailless (tll), atonal (ato), sine oculis (so), eyeless (ey) and eyes absent (eya), and EGFR signaling in establishing the Drosophila embryonic visual system. The embryonic visual system consists of the optic lobe primordium, which, during later larval life, develops into the prominent optic lobe neuropiles, and the larval photoreceptor (Bolwig's organ). Both structures derive from a neurectodermal placode in the embryonic head. Expression of tll is normally confined to the optic lobe primordium, whereas ato appears in a subset of Bolwig's organ cells that we call Bolwig's organ founders. Phenotypic analysis, using specific markers for Bolwig's organ and the optic lobe, of tll loss- and gain-of-function mutant embryos reveals that tll functions to drive cells to optic lobe as opposed to Bolwig's organ fate. Similar experiments indicate that ato has the opposite effect, namely driving cells to a Bolwig's organ fate. Since we can show that tll and ato do not regulate each other, we propose a model wherein tll expression restricts the ability of cells to respond to signaling arising from ato-expressing Bolwig's organ pioneers. Our data further suggest that the Bolwig's organ founder cells produce Spitz (the Drosophila TGFalpha homolog) signal, which is passed to the neighboring secondary Bolwig's organ cells where it activates the EGFR signaling cascade and maintains the fate of these secondary cells. The regulators of tll expression in the embryonic visual system remain elusive, as we were unable to find evidence for regulation by the ‘early eye genes’ so, eya and ey, or by EGFR signaling.