A screen for modifiers of Dpp adult phenotypes led to the identification of the Drosophila homolog of the Sno oncogene (dSno). The dSno locus is large, transcriptionally complex and contains a recent retrotransposon insertion that may be essential for dSno function, an intriguing possibility from the perspective of developmental evolution. dSno is highly transcribed in the embryonic central nervous system and transcripts are most abundant in third instar larvae. dSno mutant larvae have proliferation defects in the optic lobe of the brain very similar to those seen in baboon (Activin type I receptor) and dSmad2 mutants. This suggests that dSno is a mediator of Baboon signaling. dSno binds to Medea and Medea/dSno complexes have enhanced affinity for dSmad2. Alternatively, Medea/dSno complexes have reduced affinity for Mad such that, in the presence of dSno, Dpp signaling is antagonized. We propose that dSno functions as a switch in optic lobe development, shunting Medea from the Dpp pathway to the Activin pathway to ensure proper proliferation. Pathway switching in target cells is a previously unreported mechanism for regulating TGFbeta signaling and a novel function for Sno/Ski family proteins.