The precise coordination of signals that control proliferation is a key feature of growth regulation in developing tissues . While much has been learned about the basic components of signal transduction pathways, less is known about how receptor localization, compartmentalization, and trafficking affect signaling in developing tissues. Here we examine the mechanism by which the Drosophila Neurofibromatosis 2 (NF2) tumor suppressor ortholog Merlin (Mer) and the related tumor suppressor expanded (ex) regulate proliferation and differentiation in imaginal epithelia. Merlin and Expanded are members of the FERM (Four-point one, Ezrin, Radixin, Moesin) domain superfamily, which consists of membrane-associated cytoplasmic proteins that interact with transmembrane proteins and may function as adapters that link to protein complexes and/or the cytoskeleton . We demonstrate that Merlin and Expanded function to regulate the steady-state levels of signaling and adhesion receptors and that loss of these proteins can cause hyperactivation of associated signaling pathways. In addition, pulse-chase labeling of Notch in living tissues indicates that receptor levels are upregulated at the plasma membrane in Mer; ex double mutant cells due to a defect in receptor clearance from the cell surface. We propose that these proteins control proliferation by regulating the abundance, localization, and turnover of cell-surface receptors and that misregulation of these processes may be a key component of tumorigenesis.