During Caenorhabditis elegans vulval development, an inductive signal from the anchor cell stimulates three of the six vulval precursor cells (VPCs) to adopt vulval rather than nonvulval epidermal fates. Genes necessary for this induction include the lin-3 growth factor, the let-23 receptor tyrosine kinase, and let-60 ras. lin-15 is a negative regulator of this inductive pathway. In lin-15 mutant animals, all six VPCs adopt vulval fates, even in the absence of inductive signal. Previous genetic studies suggested that lin-15 is a complex locus with two independently mutable activities, A and B. We have cloned the lin-15 locus by germline transformation and find that it encodes two nonoverlapping transcripts that are transcribed in the same direction. The downstream transcript encodes the lin-15A function; the upstream transcript encodes the lin-15B function. The predicted lin-15A and lin-15B proteins are novel and hydrophilic. We have identified a molecular null allele of lin-15 and have used it to analyze the role of lin-15 in the signaling pathway. We find that lin-15 acts upstream of let-23 and in parallel to the inductive signal.