In the early Caenorhabditis elegans embryo most of the ectoderm arises from the AB blastomere, one of the six founder cells. We report that nonequivalent blastomeres are generated at the third division round in the AB lineage. Each AB granddaughter divides to produce one cell that has the potential to make abundant epidermis and one that instead produces primarily nervous system. This unequal distribution of the potential to make epidermis occurs in an AB granddaughter that is isolated by laser-ablation of all other cells or during the development of an isolated AB blastomere in culture. The fidelity of this event is normally masked by a signal from the MS founder cell, which induces mesoderm in particular AB descendants. When MS induction is prevented by laser cell-ablation or by a mutation in the glp-1 gene, the epidermal fate map of the AB great granddaughters becomes left-right symmetrical. Cell lineage analyses demonstrate that, in fact, the AB lineage becomes entirely left-right symmetrical in the absence of MS induction. This accounts for the extra epidermal cells previously observed in a glp-1 mutant. Our results suggest that epidermal differentiation in the nematode may be controlled by a cell-autonomous mechanism that differentially allocates epidermal potential during AB development and that MS induction generates the left-right asymmetry in the fates of AB descendants in part by overriding this potential.