An allele of the yan locus was isolated as an enhancer of the Ellipse mutation of the Drosophila epidermal growth factor receptor (Egfr) gene. This yan allele is an embryonic lethal and also fails to complement the lethality of anterior open (aop) mutations. Phenotypic and complementation analysis revealed that aop is allelic to yan and genetically the lethal alleles act as null mutations for the yan gene. Analysis of the lethal alleles in the embryo and in mitotic clones showed that loss of yan function causes cells to overproliferate in the dorsal neuroectoderm of the embryo and in the developing eye disc. Our studies suggest that the role of yan is defined by the developmental context of the cells in which it functions. An important role of this gene is in allowing a cell to choose between cell division and differentiation. The relationship of the Egfr and Notch pathways to this developmental role of yan is discussed.