The Drosophila EGF receptor ligand Spitz is cleaved by Rhomboid to generate an active secreted molecule. Surprisingly, when a cleaved variant of Spitz (cSpi) was expressed, it accumulated in the ER, both in embryos and in cell culture. A cell-based RNAi screen for loss-of-function phenotypes that alleviate ER accumulation of cSpi identified several genes, including the small wing (sl) gene encoding a PLCgamma. sl mutants compromised ER accumulation of cSpi in embryos, yet they exhibit EGFR hyperactivation phenotypes predominantly in the eye. Spi processing in the eye is carried out primarily by Rhomboid-3/Roughoid, which cleaves Spi in the ER, en route to the Golgi. The sl mutant phenotype is consistent with decreased cSpi retention in the R8 cells. Retention of cSpi in the ER provides a novel mechanism for restricting active ligand levels and hence the range of EGFR activation in the developing eye.