Meristem function in plants requires both the maintenance of stem cells and the specification of founder cells from which lateral organs arise. Lateral organs are patterned along proximodistal, dorsoventral and mediolateral axes. Here we show that the Arabidopsis mutant asymmetric leaves1 (as1) disrupts this process. AS1 encodes a myb domain protein, closely related to PHANTASTICA in Antirrhinum and ROUGH SHEATH2 in maize, both of which negatively regulate knotted-class homeobox genes. AS1 negatively regulates the homeobox genes KNAT1 and KNAT2 and is, in turn, negatively regulated by the meristematic homeobox gene SHOOT MERISTEMLESS. This genetic pathway defines a mechanism for differentiating between stem cells and organ founder cells within the shoot apical meristem and demonstrates that genes expressed in organ primordia interact with meristematic genes to regulate shoot morphogenesis.