The lozenge locus is genetically complex, containing two functionally distinct units, cistrons A and B, that influence the structure of the compound eye. Extreme mutations of either cistron produce adult phenotypes that share similarities and that have striking differences. We have analyzed the expression of several developmentally important eye genes including boss, scabrous, rhomboid, seven-up, and Bar in lozenge mutant backgrounds representing both cistrons. This analysis follows the progressive recruitment of photoreceptor neurons during eye development and has confirmed that the initial development of photoreceptors is normal up to the five cell precluster stage (R8, R2/5 and R3/4). However, when lozenge is mutant, further eye development is perturbed. As cells R1, R6 and R7 are recruited, patterns of gene expression for seven-up and Bar become abnormal. We have also characterized the expression of two different enhancer trap alleles of lozenge. The lozenge product(s) appear to be first expressed in the eye disc in undifferentiated cells shortly after the five cell precluster forms. Then, as distinct cells are recruited to a fate, lozenge expression persists and is refined in those cells. Our data suggests that lozenge functions in cone cells and pigment cells as well as in specific glia. With respect to photoreceptor neurons, lozenge biases the developmental potential of cells R1, R6 and R7, by directly influencing the expression of genes important for establishing cell fate.