Dominant Ellipse mutant alleles of the Drosophila EGF receptor homologue (DER) dramatically suppress ommatidium development in the eye and induce ectopic vein development in the wing. Their phenotype suggests a possible role for DER in specifying the founder R8 photoreceptor cells for each ommatidium. Here we analyze the basis of Ellipse mutations and use them to probe the role of DER in eye development. We show that Elp mutations result from a single amino acid substitution in the kinase domain which activates tyrosine kinase activity and MAP kinase activation in tissue culture cells. Transformant studies confirmed that the mutation is hypermorphic in vivo, but the DER function was elevated less than by ectopic expression of the ligand spitz. Ectopic spi promoted photoreceptor differentiation, even in the absence of R8 cells. Pathways downstream of DER activation were assessed to explore the basis of these distinct outcomes. Elp mutations caused overexpression of the Notch target gene E(spl) mdelta and required function of Notch to suppress ommatidium formation. The Elp phenotype also depended on the secreted protein argos and was reverted in Elp aos double mutants. Complete loss of DER function in clones of null mutant cells led to delay in R8 specification and subsequently to loss of mutant cells. The DER null phenotype was distinct from that of either spitz or vein mutants, suggesting that a combination of these or other ligands was required for aspects of DER function. In normal development DER protein was expressed in most retinal cells, but at distinct levels. We used an antibody specific for diphospho-ERK as well as expression of the DER target gene argos to assess the pattern of DER activity, finding highest activity in the intermediate groups of cells in the morphogenetic furrow. However, studies of mutant genotypes suggested that this activity may not be required for normal ommatidium development. Since we saw distinct phenotypic effects of four different levels of DER activity associated with wild-type, null mutant, Elp mutant, or fully activated DER function, we propose that multiple thresholds separate several aspects of DER function. These include activation of N signaling to repress R8 specification, turning on argos expression, and recruiting photoreceptors R1-R7. It is possible that during normal eye development these thresholds are attained by different cells, contributing to the pattern of retinal differentiation.