Patterning of sensory organs requires precise regulation of neural induction and repression. The neurocrystalline pattern of the adult Drosophila compound eye is generated by ordered selection of single founder photoreceptors (R8s) for each unit eye or ommatidium. R8 selection requires mechanisms that restrict R8 potential to a single cell from within a group of cells expressing the proneural gene atonal (ato). One model of R8 selection suggests that R8 precursors are selected from a three-cell ;R8 equivalence group' through repression of ato by the homeodomain transcription factor Rough (Ro). A second model proposes that lateral inhibition is sufficient to select a single R8 from an equipotent group of cells called the intermediate group (IG). Here, we provide new evidence that lateral inhibition, but not ro, is required for the initial selection of a single R8 precursor. We show that in ro mutants, ectopic R8s develop from R2,5 photoreceptor precursors independently of ectopic Ato and hours after normal R8s are specified. We also show that Ro directly represses the R8 specific zinc-finger transcription factor senseless (sens) in the developing R2,5 precursors to block ectopic R8 differentiation. Our results support a new model for R8 selection in which lateral inhibition establishes a transient pattern of selected R8s that is permanently reinforced by a repressive bistable loop between sens and ro. This model provides new insight into the strategies that allow successful integration of a repressive patterning signal, such as lateral inhibition, with continued developmental plasticity during retinal differentiation.