The cut locus is a complex gene whose function is necessary for specification of a number of cell types, including the external sensory organs. The cut wing class of mutations of the cut locus are homozygous viable and lack tissue from the wing margin, which is normally composed of external sensory organs and noninnervated bristles. Expression of cut was examined in the developing wings of wild-type and mutant pupae using an antiserum against Cut protein. Cut is expressed in all of the external sensory organs of the wing and the noninnervated bristles of the posterior margin. The cut wing class of mutations prevents Cut expression specifically in the wing margin mechanoreceptors and noninnervated bristles, apparently preventing neural differentiation. The transformed cells die soon after differentiation would have occurred. We identify an enhancer, located about 80 kb upstream of the cut gene promoter, that confers expression in the cells of the mechanoreceptors and noninnervated bristles from a heterologous promoter. The 27 gypsy retrotransposon insertions that prevent expression in these margin cells, all occur between this enhancer and the promoter. These gypsy insertions probably interfere with the interaction between the enhancer and the cut gene promoter.