Previous studies have shown that the development of the vulva of the C. elegans hermaphrodite involves six multipotential hypodermal cells as well as the gonadal anchor cell, which induces vulval formation. Our further examination of the interactions among these seven cells has led to the following model. Each hypodermal precursor cell becomes determined to adopt one of its three potential fates; each of these fates is to generate a particular cell lineage. In the absence of cellular interactions each precursor cell will generate the nonvulval cell lineage; an inductive signal from the anchor cell is required for a precursor cell to generate either of the two types of vulval cell lineages. The inductive signal is spatially graded, and the potency of the signal specifies which lineage is expressed by each of the tripotential precursor cells.