In the Drosophila retina, photoreceptor differentiation is preceded by significant cell shape rearrangements within and immediately behind the morphogenetic furrow. Groups of cells become clustered into arcs and rosettes in the plane of the epithelium, from which the neurons subsequently emerge. These cell clusters also have differential adhesive properties: adherens junction components are upregulated relative to surrounding cells. Little is known about how these morphological changes are orchestrated and what their relevance is for subsequent neuronal differentiation. Here, we report that the transcription factor Atonal and the canonical EGF receptor signalling cascade are both required for this clustering and for the accompanying changes in cellular adhesion. In the absence of either component, no arcs are formed behind the furrow, and all cells show low Armadillo and DE-cadherin levels, although in the case of EGFR pathway mutants, single, presumptive R8 cells with high levels of adherens junction components can be seen. Atonal regulates DE-cadherin transcriptionally, whereas the EGFR pathway, acting through the transcription factor Pointed, exerts its effects on adherens junctions indirectly, at a post-transcriptional level. These observations define a new function for EGFR signalling in eye development and illustrate a mechanism for the control of epithelial morphology by developmental signals.