For proper function of the retina, the correct proportions of retinal cell types must be generated, they must be organized into cell-specific laminae, and appropriate synaptic connections must be made. To understand the genetic regulation of retinal development, we have analyzed mutations in the mosaic eyes gene that disrupt retinal lamination, the localization of retinal cell divisions to the retinal pigmented epithelial surface and retinal pigmented epithelial development. Although retinal organization is severely disrupted in mosaic eyes mutants, surprisingly, retinal cell differentiation occurs. The positions of dividing cells and neurons in the brain appear normal in mosaic eyes mutants, suggesting that wild-type mosaic eyes function is specifically required for normal retinal development. We demonstrate that mosaic eyes function is required within the retinal pigmented epithelium, rather than in dividing retinal cells. This analysis reveals an interaction between the retinal pigmented epithelium and the retina that is required for retinal patterning. We suggest that wild-type mosaic eyes function is required for the retinal pigmented epithelium to signal properly to the retina.