In the developing Drosophila retina, the proneural gene for photoreceptor neurons is atonal, a basic helix-loop-helix transcription factor. Using atonal as a marker for proneural maturation, we examine the stepwise resolution of proneural clusters during the initiation of ommatidial differentiation in the developing eye disc. In addition, evidence is provided that atonal is negatively regulated by rough, a homeobox-containing transcription factor expressed exclusively in the retina. This interaction leads to the refinement of proneural clusters to specify R8, the first neuron to emerge in the retinal neuroepithelium. Ectopic expression of atonal or removal of rough results in the transformation of a discrete 'equivalence group' of cells into R8s. In addition, ectopic expression of rough blocks atonal expression and proneural cluster formation within the morphogenetic furrow. Thus, rough provides retina-specific regulation to the more general atonal-mediated proneural differentiation pathway. The opposing roles of atonal and rough are not mediated through the Notch pathway, as their expression remains complementary when Notch activity is reduced. These observations suggest that homeobox-containing genes can provide tissue-specific regulation to bHLH factors.