Homozygosity for lethal(2)giant larvae (lgl), a mutation in a tumor suppressor gene of Drosophila, induces neoplasia of the imaginal discs. To explore the developmental capacities of lgl mutant cells, we have investigated their growth and differentiation in genetic mosaics. Adult wings mosaic for lgl displayed abnormal growth and differentiation of the lgl mutant and neighboring wild-type cells, suggesting aberrant cell-cell interactions during development. lgl mutant clones also straddled the anteroposterior boundary of the wing imaginal disc, apparently due to failure of the cells of the anterior and the posterior compartment to segregate at the boundary. To further test if anteroposterior compartmentalization takes place in the neoplastic imaginal discs of lgl mutant larvae, we studied the expression of an engrailed (en)-specific lacZ reporter gene during progressive stages of their tumorous growth. Our results show that en is activated in the posterior compartments of the neoplastic imaginal discs. However, during later stages of tumorous overgrowth, the en-expressing and nonexpressing cells appear to show extensive intermixing. These observations suggest that neoplastic transformation of imaginal discs involves loss of their normal cell-cell interactions and signaling.