Color vision is based on the differential color sensitivity of retinal photoreceptors, however the developmental programs that control photoreceptor cell differentiation and specify color sensitivity are poorly understood. In Drosophila there is growing evidence that the color sensitivity of the R8 cell within an individual ommatidium is regulated by an inductive signal from the adjacent R7 cell. We previously examined the retinal patterning defect in Scutoid mutants, which results from a disruption of rhomboid expression. Here we show that loss of rhomboid blocks the induction of Rh5 expression and misexpression of rhomboid leads to the inappropriate induction of Rh5. These effects are specific to rhomboid, because its paralogue roughoid is neither required nor sufficient for the induction of Rh5 expression. We show that rhomboid is required cell-autonomously within the R8 photoreceptor cells and nonautonomously elsewhere in the eye for Rh5 induction. Interestingly, we found that the Epidermal growth factor receptor is also required for Rh5 induction, and its activation is sufficient to rescue the loss of Rh5 induction in a rhomboid mutant. This suggests that rhomboid may function in R8 cells to activate Epidermal growth factor receptor signaling in R7 cells and promote their differentiation to a signaling competent state.