The brain of the ascidian larva comprises two pigment cells, termed the ocellus melanocyte and the otolith melanocyte. Cell lineage analysis has shown that the two bilateral pigment lineage cells (a-line blastomeres) in the animal hemisphere give rise to these melanocytes in a complementary manner. The results of the present investigation suggest that the specification of the fate of pigment cells proceeds in two distinct steps. First, the determination of pigment lineage cells requires an inductive interaction from the vegetal blastomeres of the A-line. Cell dissociation experiments demonstrated that the inductive interaction is completed by the midgastrula stage. However, the two bilaterally positioned cells destined to become the pigment cells in the first step are still equipotent at this stage in that they can give rise to either the ocellus or otolith. Thus, they constitute what is termed an "equivalence group." In the second step, the individual fates of the two cells that compose the equivalence group are determined. Namely, one cell develops into an ocellus and the other cell develops into an otolith. Photoablation of one of the pigment precursor cells at various stages indicated that the second step of determination occurs at the midtailbud stage. It is suggested that the cue to choose one of the alternative developmental pathways may be positional information that exists along the anteroposterior axis. The second step of determination is thought to be mediated by a hierarchical interaction. In the absence of this interaction, melanocyte specification proceeds along the dominant pathway that results in the differentiation of an ocellus.