Several studies have established that melatonin synthesis occurs in the retina of vertebrates, including mammals. In mammals, a subpopulation of photoreceptors (probably the cones) synthesize melatonin. Melatonin synthesis in the retina is elevated at night and reduced during the day in a fashion similar to events in the pineal gland. Both the MT1 and MT2 melatonin receptors are present in the retina and retinal melatonin does not contribute to circulating levels, suggesting that retinal melatonin acts locally as a neurohormone and/or neuromodulator. Melatonin synthesis in the retina of mammals is under the control of a circadian oscillator, and circadian rhythms in melatonin synthesis and/or release have been described for several species of mammals. These rhythms are present in vivo, persist in vitro, are entrained by light and are temperature compensated. The cloning of the gene responsible for the synthesis of the enzyme arylalkylamine N-acetyltransferase (the key enzyme in the melatonin biosynthetic pathway) has allowed studies of the molecular mechanisms responsible for the generation of retinal melatonin rhythmicity. The present review focuses on the cellular and molecular mechanisms that regulate melatonin synthesis. In particular, we discuss how the photic environment and the circadian clock interact in determining melatonin levels, in addition to the role that melatonin plays in retinal physiology.