The differentiation of cells in the Drosophila eye is precisely coordinated in time and space. Each ommatidium is founded by a photoreceptor (R)8 cell and these founder cells are added in consecutive rows. Within a row, the nascent R8 cells appear in precise locations that lie out of register with the R8 cells in the previous row. The bHLH protein Atonal determines the development of the R8 cells. The expression of atonal is induced shortly before the selection of a new row of R8 cells and is initially detected in a stripe. Subsequently atonal expression resolves into regularly spaced clusters (proneural clusters) that prefigure the positions of the future R8 cells. The serial induction of atonal expression, and hence the increase in the number of rows of R8 cells, requires Hedgehog function. Here it is shown that, in addition to this role, Hedgehog signalling is also required to repress atonal expression between the nascent proneural clusters. This repression has not been previously described and appears to be critical for the positioning of Atonal proneural clusters and, therefore, the R8 cells. The two temporal responses to Hedgehog are due to direct stimulation of the responding cells by Hedgehog itself.