The Drosophila seven-up (svp) gene specifies outer photoreceptor cell fate in eye development and encodes an orphan nuclear receptor with two isoforms. Transient expression under the sevenless enhancer of either svp isoform leads to a dosage-dependent transformation of cone cells into R7 photoreceptors, and at a lower frequency, R7 cells into outer photoreceptors. To investigate the cellular pathways involved, we have taken advantage of the dosage sensitivity and screened for genes that modify this svp-induced phenotype. We show that an active Ras pathway is essential for the function of both Svp isoforms. Loss-of-function mutations in components of the Ras signal transduction cascade act as dominant suppressors of the cone cell transformation, whilst loss-of-function mutations in negative regulators of Ras-activity act as dominant enhancers. Furthermore, Svp-mediated transformation of cone cells to outer photoreceptors, reminiscent of its wild-type function in specifying R3/4 and R1/6 identity, requires an activated Ras pathway in the same cells, or alternatively dramatic increase in ectopic Svp protein levels. Our results indicate that svp is only fully functional in conjunction with activated Ras. Since we find that mutations in the Egf-receptor are also among the strongest suppressors of svp-mediated cone cell transformation, we propose that the Ras activity in cone cells is due to low level Egfr signaling. Several models that could account for the observed svp regulation by the Ras pathway are discussed.