Development of the symbiotic association in the bipartite lichen Pseudocyphellaria crocata was investigated by characterizing two regions of the thallus. Thallus organization was examined using microscopy. A HIP1-based differential display technique was modified for use on Nostoc strains, including lichenized strains. Northern hybridization and quantitative real-time polymerase chain reaction were used to confirm differential display results, and determine expression levels of key cyanobacterial genes. Photosystem II yield across the thallus was measured using pulse-amplitude modulated fluorescence. Microscopy revealed structural differences in the thallus margins compared with the centre and identified putative heterocysts in both regions. Differential display identified altered transcript levels in both Nostoc punctiforme and a lichenized Nostoc strain. Transcript abundance of cox2, atpA, and ribA was increased in the thallus margin compared with the centre. Expression of cox2 is heterocyst specific and expression of other heterocyst-specific genes (hetR and nifK) was elevated in the margin, whereas, expression of psbB and PSII yield were not. Structural organization of the thallus margin differed from the centre. Both regions contained putative heterocysts but gene expression data indicated increased heterocyst differentiation in the margins where photosystem II yield was decreased. This is consistent with a zone of heterocyst differentiation within the thallus margin.