Cell-type specification in the Drosophila compound eye begins at the morphogenetic furrow. The furrow sweeps across the developing eye epithelium and is coincident with four classes of cellular events: coordinated changes in cell shape, changes in gene expression, synchronization of the cell cycle, and the specification of a regular array of ommatidial founder cells. The molecular mechanisms that induce these events in the developing eye have hitherto been unknown. We identify here a gene specifically required for furrow progression, hedgehog (hh). We show that hh expression posterior to the morphogenetic furrow is continuously required for its progression. We propose that forward diffusion of hh protein induces anterior cells to enter the furrow.