Extracellular factors such as FGF and EGF control various aspects of morphogenesis, patterning and cellular proliferation in both invertebrates and vertebrates. In most systems, it is primarily the distribution of these factors that controls the differential behavior of the responding cells. Here we describe the role of Sprouty in eye development. Sprouty is an extracellular protein that has been shown to antagonize FGF signaling during tracheal branching in Drosophila. It is a novel type of protein with a highly conserved cysteine-rich region. In addition to the embryonic tracheal system, sprouty is also expressed in other tissues including the developing eye imaginal disc, embryonic chordotonal organ precursors and the midline glia. In each of these tissues, EGF receptor signaling is known to participate in the control of the correct number of neurons or glia. We show that, in all three tissues, the loss of sprouty results in supernumerary neurons or glia, respectively. Furthermore, overexpression of sprouty in wing veins and ovarian follicle cells, two other tissues where EGF signaling is required for patterning, results in phenotypes that resemble the loss-of-function phenotypes of Egf receptor. These results suggest that Sprouty acts as an antagonist of EGF as well as FGF signaling pathways. These receptor tyrosine kinase-mediated pathways may share not only intracellular signaling components but also extracellular factors that modulate the strength of the signal.