The four-cell C. elegans embryo contains two sister cells called ABa and ABp that initially have equivalent abilities to produce ectodermal cell types. Multiple Notch-mediated interactions occur during the early cell divisions that diversify the ABa and ABp descendants. The first interaction determines the pattern of ectodermal cell types produced by ABp. The second interaction induces two ABa granddaughters to become mesodermal precursors. We show that T-box transcription factors called TBX-37 and TBX-38 are essential for mesodermal induction, and that these factors are expressed in ABa, but not ABp, descendants. We provide evidence that the first Notch interaction functions largely, if not entirely, to prevent TBX-37, TBX-38 expression in ABp descendants. Neither the second Notch interaction nor TBX-37, TBX-38 alone are sufficient for mesodermal induction, indicating that both must function together. We conclude that TBX-37, TBX-38 play a key role in distinguishing the outcomes of two sequential Notch-mediated interactions.