Background: Proper neurogenesis in the developing Drosophila retina requires the regulated expression of the basic helix-loop-helix (bHLH) proneural transcription factors Atonal (Ato) and Daughterless (Da). Factors that control the timing and spatial expression of these bHLH proneural genes in the retina are required for the proper formation and function of the adult eye and nervous system. Results: Here we report that lilliputian (lilli), the Drosophila homolog of the FMR2/AF4 family of proteins, regulates the transcription of ato and da in the developing fly retina. We find that lilli controls ato expression at multiple enhancer elements. We also find that lilli contributes to ato auto-regulation in the morphogenetic furrow by first regulating the expression of da prior to ato. We show that FMR2 regulates the ato and da homologs MATH5 and TCF12 in human cells, suggesting a conservation of this regulation from flies to humans. Conclusions: We conclude that lilliputian is part of the genetic program that regulates the expression of proneural genes in the developing retina. Developmental Dynamics 241:553–562, 2012. © 2012 Wiley Periodicals, Inc.