Argos is a secreted protein that contains an EGF-like domain and acts as an inhibitor of Drosophila EGF receptor activation. To identify genes that function in the Argos-regulated signaling pathway, we performed a genetic screen for enhancers and suppressors of the eye phenotype caused by the overexpression of argos. As a result, new alleles of known genes encoding components of the EGF receptor pathway, such as Star, sprouty, bulge, and clown, were isolated. To study the role of clown in development, we examined the eye and wing phenotypes of the clown mutants in detail. In the eye discs of clown mutants, the pattern of neuronal differentiation was impaired, showing a phenotype similar to those caused by a gain-of-function EGF receptor mutation and overexpression of secreted Spitz, an activating ligand for the EGF receptor. There was also an increased number of pigment cells in the clown eyes. Epistatic analysis placed clown between argos and Ras1. In addition, we found that clown negatively regulated the development of wing veins. These results suggest that the clown gene product is important for the Argos-mediated inhibition of EGF receptor activation during the development of various tissues. In addition to the known genes, we identified six mutations of novel genes. Genetic characterization of these mutants suggested that they have distinct roles in cell differentiation and/or survival regulated by the EGF receptor pathway.