The use of stem-cell therapy to treat retinal degeneration holds great promise. However, definitive methods of retinal differentiation that do not depend on recombinant proteins produced in animal or Escherichia coli cells have not been devised. Here, we report a defined culture method using low-molecular-mass compounds that induce differentiation of human embryonic stem (ES) cells and induced pluripotent stem (iPS) cells into retinal progenitors, retinal pigment epithelium cells and photoreceptors. The casein kinase I inhibitor CKI-7, the ALK4 inhibitor SB-431542 and the Rho-associated kinase inhibitor Y-27632 in serum-free and feeder-free floating aggregate culture induce retinal progenitors positive for RX, MITF, PAX6 and CHX10. The treatment induces hexagonal pigmented cells that express RPE65 and CRALBP, form ZO1-positive tight junctions and exhibit phagocytic functions. Subsequent treatment with retinoic acid and taurine induces photoreceptors that express recoverin, rhodopsin and genes involved in phototransduction. Both three-factor (OCT3/4, SOX2 and KLF4) and four-factor (OCT3/4, SOX2, KLF4 and MYC) human iPS cells could be successfully differentiated into retinal cells by small-molecule induction. This method provides a solution to the problem of cross-species antigenic contamination in cell-replacement therapy, and is also useful for in vitro modeling of development, disease and drug screening.