Species differences in perception have been linked to divergence in gross neuroanatomical features of sensory pathways. The anatomical and physiological basis of evolutionary change in sensory processing at cellular and circuit levels, however, is poorly understood. Here, we show how specific changes to a sensory microcircuit are associated with the evolution of a novel perceptual ability. In mormyrid fishes, the ability to detect variation in electric communication signals is correlated with an enlargement of the midbrain exterolateral nucleus (EL), and a differentiation into separate anterior (ELa) and posterior (ELp) regions. We show that the same cell types and connectivity are found in both EL and ELa/ELp. The evolution of ELa/ELp, and the concomitant ability to detect signal variation, is associated with a lengthening of incoming hindbrain axons to form delay lines, allowing for fine temporal analysis of signals. The enlargement of this brain region is also likely due to an overall increase in cell numbers, which would allow for processing of a wider range of timing information.