Formation of the apical surface and lumen is a fundamental, yet poorly understood, step in epithelial organ development. We show that PTEN localizes to the apical plasma membrane during epithelial morphogenesis to mediate the enrichment of PtdIns(4,5)P2 at this domain during cyst development in three-dimensional culture. Ectopic PtdIns(4,5)P2 at the basolateral surface causes apical proteins to relocalize to the basolateral surface. Annexin 2 (Anx2) binds PtdIns(4,5)P2 and is recruited to the apical surface. Anx2 binds Cdc42, recruiting it to the apical surface. Cdc42 recruits aPKC to the apical surface. Loss of function of PTEN, Anx2, Cdc42, or aPKC prevents normal development of the apical surface and lumen. We conclude that the mechanism of PTEN, PtdIns(4,5)P2, Anx2, Cdc42, and aPKC controls apical plasma membrane and lumen formation.