Physical and functional characteristics of the RUNX family of transcription factors are conserved between vertebrates and the Drosophila protein Lozenge. The runt-homology domain responsible for DNA binding and also the C-terminus are both nearly identical between the two proteins. The mammalian and fly proteins heterodimerize with a non-DNA binding partner protein to form a core binding factor essential for gene regulation during cell differentiation. The mammalian protein RUNX1 (AML1/PEBP2alphaB) interacts with the transcription factor Ets-1 to increase DNA binding and transactivation potential. Alternative splicing of the mammalian RUNX1 removes a domain required for this cooperative transactivation. In this work we determine the structure of the lozenge transcription unit and map 21 mutations. We show that the lozenge transcript is alternatively spliced during eye development to remove an Ets interaction domain. Emphasis is placed on Pointed the Drosophila homolog of the vertebrate Ets-1 protein; both Lozenge and Pointed proteins are needed for the activation of prospero expression. We use site-directed mutagenesis and yeast two-hybrid analysis to show that conserved amino acids within the alternate Lozenge exon are important for interaction with Pointed. Furthermore, the ectopic expression of Lozenge is sufficient to rescue Prospero expression in the presence of the Pointed competitor, Yan(ACT). We show that both lozenge isoforms are expressed during eye development and that the relative ratio of the transcripts for the two isoforms is sensitive to changes in Ras activity. We suggest that during eye development, Lozenge isoforms function in divergent roles, either interacting with Pointed on downstream targets or by functioning independently to establish distinct cell fates.