BACKGROUND: The neurons in the vertebrate retina arise from multipotent retinal progenitor cells (RPCs). It is not clear, however, which progenitors are multipotent or why they are multipotent. RESULTS: In this study we show that the homeodomain transcription factor Vsx2 is initially expressed throughout the retinal epithelium, but later it is downregulated in all but a minor population of bipolar cells and all Muller glia. The Vsx2-negative daughters of Vsx2-positive RPCs divide and give rise to all other cell types in the retina. Vsx2 is a repressor whose targets include transcription factors such as Vsx1, which is expressed in the progenitors of distinct non-Vsx2 bipolars, and the basic helix-loop-helix transcription factor Ath5, which restricts the fate of progenitors to retinal ganglion cells, horizontal cells, amacrine cells and photoreceptors fates. Foxn4, expressed in the progenitors of amacrine and horizontal cells, is also negatively regulated by Vsx2. CONCLUSION: Our data thus suggest Vsx2-positive RPCs are fully multipotent retinal progenitors and that when Vsx2 is downregulated, Vsx2-negative progenitors escape Vsx2 repression and so are able to express factors that restrict lineage potential.