BACKGROUND: Sox proteins encompass an evolutionarily conserved family of transcription factors with critical roles in animal development and stem cell biology. In common with vertebrates, the Drosophila group B proteins SoxNeuro and Dichaete are involved in central nervous system development, where they play both similar and unique roles in gene regulation. Sox genes show extensive functional redundancy across metazoans, but the molecular basis underpinning functional compensation mechanisms at the genomic level are currently unknown. RESULTS: Using a combination of genome-wide binding analysis and gene expression profiling, we show that SoxNeuro directs embryonic neural development from the early specification of neuroblasts through to the terminal differentiation of neurons and glia. To address the issue of functional redundancy and compensation at a genomic level, we compare SoxNeuro and Dichaete binding, identifying common and independent binding events in wild-type conditions, as well as instances of compensation and loss of binding in mutant backgrounds. CONCLUSIONS: We find that early aspects of group B Sox functions in the central nervous system, such as stem cell maintenance and dorsoventral patterning, are highly conserved. However, in contrast to vertebrates, we find that Drosophila group B1 proteins also play prominent roles during later aspects of neural morphogenesis. Our analysis of the functional relationship between SoxNeuro and Dichaete uncovers evidence for redundant and independent functions for each protein, along with unexpected examples of compensation and interdependency, thus providing new insights into the general issue of transcription factor functional redundancy.