Transcription factor which plays a key role in the Hippo/SWH (Sav/Wts/Hpo) signaling pathway, a signaling pathway that plays a pivotal role in organ size control and tumor suppression by restricting proliferation and promoting apoptosis. The core of this pathway is composed of a kinase cascade wherein Hippo (Hpo), in complex with its regulatory protein Salvador (Sav), phosphorylates and activates Warts (Wts) in complex with its regulatory protein Mats, which in turn phosphorylates and inactivates the Yorkie (Yki) oncoprotein. The Hippo/SWH signaling pathway inhibits the activity of the transcriptional complex formed by Scalloped (sd) and Yki and the target genes of this pathway include cyclin-E (cycE), diap1 and bantam. Sd promotes nuclear localization of Yki. Involved in the regulation of cell-specific gene expression during development, particularly in the differentiation of the nervous system. When in combination with vestigial (vg) it acts as a transcriptional activation complex that regulates gene expression in the wing. Binding to vg switches the DNA target selectivity of sd. Required autonomously for cell proliferation and viability within the wing blade. Required for proper sensory organ precursor (SOP) differentiation at the wing margin; required for correct expression of sens. The C-terminus of sd interacts with the C-terminal serine-rich protein domain of vg, to form a complex which acts as a selector for wing development. Interacts (via C-terminus) with yki (via N-terminus) and this interaction enhances its transcriptional activity. Subset of neuroblasts in the central nervous system and in the peripheral sense organs of the embryo. Expressed in the developing wing primordia initially along the D/V wing boundary, and by the late third larval instar, maximal expression is seen in cells at the D/V wing disk boundary. Less expression in cells located farther from this boundary. Also expressed in wing progenitor cells.