The development of the visual centers of the Drosophila brain is tightly regulated by the ingrowth of retinal axons from the developing eye. In the first optic ganglion, the lamina, arriving retinal axons trigger the precursors of their synaptic partners to complete a final cell division and commence neural differentiation. The secreted product of the hedgehog gene regulates the temporal assembly of photoreceptor precursor cells into ommatidial clusters in the compound eye. Here, we show that Hedgehog is transmitted along the retinal axons to serve as the inductive signal in the brain. Hedgehog acts in the first of two retinal axon-mediated steps in the assembly of lamina synaptic cartridges. These observations provide a novel insight into the molecular interactions that orchestrate the assembly of neural precursor cells into precise synaptic circuits.