The Drosophila eye disc is a sac of single layer epithelium with two opposing sides, the peripodial membrane (PM) and the disc proper (DP). Retinal morphogenesis is organized by Notch signaling at the dorsoventral (DV) boundary in the DP. Functions of the PM in coordinating growth and patterning of the DP are unknown. We show that the secreted proteins, Hedgehog, Wingless, and Decapentaplegic, are expressed in the PM, yet they control DP expression of Notch ligands, Delta and Serrate. Peripodial clones expressing Hedgehog induce Serrate in the DP while loss of peripodial Hedgehog disrupts disc growth. Furthermore, PM cells extend cellular processes to the DP. Therefore, peripodial signaling is critical for eye pattern formation and may be mediated by peripodial processes.