The retinoblastoma gene Rb is a prototype tumor suppressor which is conserved in Drosophila. Although much is known about the roles of Rb in cell proliferation and apoptosis, much less is known about how Rb regulates cell differentiation. Inactivation of Drosophila Rb (rbf) exhibited subtle differentiation defects similar to inactivation of Rb in mice, suggesting the existence of redundant mechanisms in the control of cell differentiation. To test this possibility and to characterize the role of Rbf in cell differentiation during retinal development, we carried out a genetic screen and identified a mutation in rhinoceros (rno), which leads to synergistic differentiation defects in conjunction with rbf inactivation. Characterization of an early differentiation defect, the multiple-R8 phenotype, revealed that this phenotype was caused by limiting amounts of Notch signaling due to reduced expression of the Notch ligand, Delta (Dl). Decreasing the gene dosage of Dl enhanced the multiple-R8 phenotype, while increasing the level of Dl suppressed this phenotype. Interestingly, removal of the transcriptional activation of dE2F1 partially restores Dl expression in rbf,rno mutant clones and suppresses the associated differentiation defects, indicating that this differentiation function of RBF is mediated by its regulation of dE2F1 activity.