The orphan nuclear receptor NR2E3 is a direct transcriptional target of NRL, the key basic motif leucine zipper transcription factor that dictates rod versus cone photoreceptor cell fate in the mammalian retina. The lack of NR2E3 function in humans and in retinal degeneration rd7 mutant mouse leads to increased S-cones accompanied by rod degeneration, whereas ectopic expression of Nr2e3 in the cone-only Nrl(-/-) retina generates rod-like cells that do not exhibit any visual function. Using GFP to tag the newborn rods and by 5-bromo-2'-deoxyuridine birthdating, we demonstrate that early-born post-mitotic photoreceptor precursors in the rd7 retina express cone-specific genes. Transgenic mouse studies in the rd7 background show that Nr2e3 when expressed under the control of Crx promoter can restore rod photoreceptor function and suppress cone gene expression. Furthermore, Nr2e3 expression in photoreceptor precursors committed to be rods (driven by the Nrl promoter) could completely rescue the retinal phenotype of the rd7 mice. We conclude that excess of S-cones in the rd7 retina originate from photoreceptor precursors with a 'default' fate and not from proliferation of cones and that Nr2e3 is required to suppress the expression of S-cone genes during normal rod differentiation. These studies further support the 'transcriptional dominance' model of photoreceptor cell fate determination and provide insights into the pathogenesis of retinal disease phenotypes caused by NR2E3 mutations.