The development of the lamina, the first optic ganglion of the fly visual system, depends on inductive cues from the innervating photoreceptor axons. lacZ expression from a P-element insertion, A72, occurs in the anlage of the lamina coincident with axon ingrowth from the eye imaginal disc. In eyeless mutants lacking photoreceptor axons, lacZ expression did not occur. The P-element was found to have inserted within the 3' long terminal repeat (LTR) of a '17.6' type retrotransposon. The expression pattern of 17.6 transcripts in the brain in wild-type and eyeless mutants paralleled the expression of the lacZ reporter. Analysis of 17.6 cis-regulatory sequences indicates that the lamina-specific expression is due to the combined action of an enhancer element in the LTR and a repressor element within the internal body of the retrotransposon. The regulation of the 17.6 retrotransposon provides a model for the study of innervation-dependent gene expression in postsynaptic cells during neurogenesis.