The Notch and Epidermal Growth Factor Receptor (EGFR) pathways both regulate proliferation and differentiation, and the cellular response to each is often influenced by the other. Here, we describe a mechanism that links them in a sequential fashion, in the developing compound eye of Drosophila. EGFR activation induces photoreceptor (R cell) differentiation and promotes their expression of Delta. This Notch ligand then induces neighboring cells to become nonneuronal cone cells. ebi and strawberry notch (sno) regulate EGFR-dependent Delta transcription by antagonizing a repressor function of Suppressor of Hairless (Su(H)). Sno binds to Su(H), and Ebi, an F-box/WD40 protein, forms a complex with Su(H) and the corepressor SMRTER. EGFR-activated transcriptional derepression requires ebi and sno, is proteasome-dependent, and correlates with the translocation of SMRTER to the cytoplasm.