THE earliest physical sign of differentiation in the Drosophila retina is the passage of the morphogenetic furrow across the epithelium of the eye disc(1,2). Secreted factors encoded by hedgehog (hh)(3-7) and decapentaplegic (dpp)(8-10) have been implicated in propagation of the furrow(11,12) and the subsequent initiation of photoreceptor differentiation. The morphogenetic furrow initiates at the posterior edge of the third larval instar eye imaginal disc, Its continued progression towards the anterior is believed to depend upon secretion of Hh protein by the differentiating clusters of photoreceptors that emerge posterior to the moving furrow(11,12). This progression is marked by the initiation of expression of the transforming growth factor-beta homologue Dpp in cells entering the furrow anteriorly, and loss of dpp expression in cells emerging posteriorly(16,17). Although the transmembrane protein encoded by the patched gene has been genetically implicated as the Hh receptor(12,18-20), the intercellular signalling pathways involved in these inductive processes remain uncharacterized. Here we show that the catalytic subunit of cyclic AMP-dependent protein kinase A (Pka-C1)(13-15) is required for the correct spatial regulation of dpp expression during eye development. Loss of Pka-C1 function is sufficient to produce an ectopic morphogenetic wave marked by premature ectopic photoreceptor differentiation and non-autonomous propagation of dpp expression. Our results indicate that Pka-C1 lies in a signalling pathway that controls the orderly temporal progression of differentiation across the eye imaginal disc.