Most marine invertebrates have a biphasic life cycle with planktonic larval and benthic juvenile/adult phases. The transition from larva to juvenile, known as metamorphosis, is typically characterized by drastic changes in morphology, physiology and ecology. Settlement and metamorphosis are often induced by specific environmental signals associated with habitats suitable for the animal's survival and reproduction. However, little is known about the molecular and cellular events that occur following the induction of settlement and the initiation of metamorphosis. To address this, we investigated the cellular changes in the marine sponge Amphimedon queenslandica that occur during the first six hours after the larva has been induced to settle upon a coralline alga. During this early metamorphosis, the larval body plan collapses and postlarval development commences, which will lead to the formation of a filter-feeding juvenile four days later. Within the first six hours, the larval epithelium disintegrates with some epithelial cells undergoing apoptosis and others transdifferentiating into migrating amoebocytes by undergoing an epithelial-mesenchymal transition. These two contrasting cellular processes seem to occur randomly amongst larval epithelial cells. This analysis of larval epithelial cell fate reveals the first cellular events induced by the coralline algal signals encountered during settlement in A. queenslandica.