The JAK/STAT pathway exerts pleiotropic effects on a wide range of developmental processes in Drosophila. Four key components have been identified: Unpaired, a secreted ligand; Domeless, a cytokine-like receptor; Hopscotch, a JAK kinase; and Stat92E, a STAT transcription factor. The identification of additional components and regulators of this pathway remains an important issue. To this end, we have generated a transgenic line where we misexpress the upd ligand in the developing Drosophila eye. GMR-upd transgenic animals have dramatically enlarged eye-imaginal discs and compound eyes that are normally patterned. We demonstrate that the enlarged-eye phenotype is a result of an increase in cell number, and not cell volume, and arises from additional mitoses in larval eye discs. Thus, the GMR-upd line represents a system in which the proliferation and differentiation of eye precursor cells are separable. Removal of one copy of stat92E substantially reduces the enlarged-eye phenotype. We performed an F1 deficiency screen to identify dominant modifiers of the GMR-upd phenotype. We have identified 9 regions that enhance this eye phenotype and two specific enhancers: C-terminal binding protein and Daughters against dpp. We also identified 20 regions that suppress GMR-upd and 13 specific suppressors: zeste-white 13, pineapple eye, Dichaete, histone 2A variant, headcase, plexus, kohtalo, crumbs, hedgehog, decapentaplegic, thickveins, saxophone, and Mothers against dpp.