In the nematode Caenorhabditis elegans six hypodermal cells, the vulval precursor cells, are each competent to generate vulval cells. Normally only the three nearest precursor cells to the uterine anchor cell generate the vulva (22 nuclei), while the three others fuse with the non-specialized hypodermal syncytium (hyp7) surrounding each precursor cell and covering the body. Without an inductive signal from the anchor cell, all six vulval precursor cells fuse with hyp7 and no vulva is formed. But without activity of the vulval determination gene lin-15(+), all six cells undergo vulval divisions whether the anchor cell is present or not. Using mosaic analysis, we demonstrate here that lin-15(+) expression is necessary in cells other than the vulval precursor cells or the anchor cell, most probably in the hyp7 syncytium. We propose that lin-15(+) is active in hyp7 in order to repress an intrinsic vulval program in the precursor cells. The inductive signal from the anchor cell counteracts this repression for three precursor cells, allowing them to generate vulval cells. Such a two-signal (repressor/derepressor) mechanism may operate in other cases of tissue induction.