A circadian rhythm in the frequency of compound action potentials (CAPs) in the optic nerve of the mollusc Bulla gouldiana is believed to be generated by the basal retinal neurons (BRNs) of the eye. Along with the CAPs, which are about 100 microV in amplitude, there are 10- to 40-microV impulses from an undetermined cell type in records from the optic nerve. These impulses, called "small spikes," are generated spontaneously in darkness and show a circadian rhythm in frequency that is about 12 hr out of phase with the CAP rhythm. To enable us to determine the origin of the small spikes, intracellular recordings were made from retinal cells while optic nerve activity was monitored. The cells were identified by their light responses and then injected with the fluorescent dye Lucifer Yellow CH or the tracer biocytin. It was found that the large photoreceptors of the distal retina generated graded depolarizations in response to light, and had axons in the optic nerve, but did not show impulses at the level of the photoreceptor layer. By contrast, the spiking retinal cells of the photoreceptor layer generated depolarizations and impulses in response to light. In addition, the spiking cells were found to be dye-coupled to a series of retinal cells approximately 7 microns in diameter, connected to a single axon in the optic nerve. Impulses from the spiking cells occurred spontaneously and correspond with the small spikes in the optic nerve. The BRNs appear to inhibit the retinal cells that generate the small spikes. Hyperpolarization of the BRNs, through constant-current injection, increased the number of small spikes in the optic nerve. Release from hyperpolarization led to a decrease in small spikes. This could explain how circadian changes in BRN membrane potential might modulate spontaneous firing of the spiking cells, resulting in the circadian rhythm in small-spike frequency.