Cell type specification and differentiation in the developing Drosophila compound eye begins in the morphogenetic furrow. In the furrow, cells are organized into evenly spaced preclusters and there is a synchronized arrest of the cells' mitotic cycle in G1. We report that recessive spitz loss-of-function mutations affect compound eye development. Spitz is homologous to the human transforming growth factor-alpha. In mosaic clones, spitz function is required in the first photoreceptor cells to differentiate for normal ommatidial development. spitz loss-of-function mutations are dominant suppressors of EgfrE gain-of-function mutations of the epidermal growth factor-receptor gene. These data suggest that the spitz product is a precluster promoting factor. spitz transcription increases abruptly in the morphogenetic furrow, the obverse of Egfr expression. We present a model for the expression of, and cellular requirement for, this growth factor homolog.