The Salvador-Warts-Hippo (Hippo) pathway is an evolutionarily conserved regulator of organ growth and cell fate. It performs these functions in epithelial and neural tissues of both insects and mammals, as well as in mammalian organs such as the liver and heart. Despite rapid advances in Hippo pathway research, a definitive role for this pathway in hematopoiesis has remained enigmatic. The hematopoietic compartments of Drosophila melanogaster and mammals possess several conserved features [1, 2]. D. melanogaster possess three types of hematopoietic cells that most closely resemble mammalian myeloid cells: plasmatocytes (macrophage- like cells), crystal cells (involved in wound healing), and lamellocytes (which encapsulate parasites). The proteins that control differentiation of these cells also control important blood lineage decisions in mammals [3-10]. Here, we define the Hippo pathway as a key mediator of hematopoiesis by showing that it controls differentiation and proliferation of the two major types of D. melanogaster blood cells, plasmatocytes and crystal cells. In animals lacking the downstream Hippo pathway kinase Warts, lymph gland cells overproliferated, differentiated prematurely, and often adopted a mixed lineage fate. The Hippo pathway regulated crystal cell numbers by both cell-autonomous and non-cell-autonomous mechanisms. Yorkie and its partner transcription factor Scalloped were found to regulate transcription of the Runx family transcription factor Lozenge, which is a key regulator of crystal cell fate. Further, Yorkie or Scalloped hyperactivation induced ectopic crystal cells in a non-cell-autonomous and Notch-pathway-dependent fashion.