The compound eye of Drosophila melanogaster consists of individual subunits (“ommatidia”), each containing photoreceptors and support cells. These cells derive from an undifferentiated epithelium in the eye imaginal disc and their differentiation follows a highly stereotypic pattern. Sequential commitment of pluripotent cells to become specialized cells of the visual system serves as a unique model system to study basic mechanisms of tissue development. In the past years, many regulatory genes that govern the development of the compound eye have been identified and their mode of action genetically dissected. Transcription factor networks in combination with cell–cell signalling pathways regulate the development of the eye tissue in a precise temporal and spatial manner. Here, we review the recent advances on how a single-cell-layered epithelium is patterned to give rise to the compound eye. We discuss the molecular pathways controlling differentiation of individual photoreceptors, through which they acquire their functional specificity. Developmental Dynamics 241:40–56, 2012. © 2011 Wiley Periodicals, Inc.