The anterior pituitary gland provides a model for investigating the molecular basis for the appearance of phenotypically distinct cell types, within an organ, a central question in development. The rat prolactin and growth hormone genes are selectively expressed in distinct cell types (lactotrophs and somatotrophs) of the anterior pituitary gland, which reflect differential mechanisms of gene activation or restriction because of interactions of multiple factors binding to these genes. We find that the pituitary-specific 33,000 dalton transcription factor, Pit-1, normally expressed in somatotrophs, lactotrophs, and thyrotrophs, can bind to and activate both growth hormone and prolactin promoters in vitro at levels even tenfold lower than those normally present in pituitary cells. In the case of the prolactin gene, high levels of expression in transgenic animals required two cis-active regions; a distal enhancer (-1.8 to -1.5 kb) and a proximal region (-422 to +33 bp). Each of these regions alone can direct low levels of fusion gene expression to prolactin-producing cell types in transgenic mice, but a synergistic interaction between these regions is necessary for high levels of expression. The initial appearance of the prolactin transgene expression closely follows the appearance of high levels of Pit-1, but later increases in expression coincident with appearance of mature lactotrophs suggest the operation of additional, critical positive factor(s). Unexpectedly, transgenes containing the distal enhancer removed from its normal context are expressed in both the prolactin-producing lactotrophs and the TSH-producing thyrotrophs, thereby suggesting that sequences flanking this enhancer are necessary to restrict expression to the correct cell type within the pituitary. These data indicate that distinct processes of gene activation and restriction are necessary for the fidelity of cell-type specific expression within an organ. Consistent with this model, we find that lactotroph cell lines that cannot express the growth hormone gene contain high levels of functional Pit-1. We suggest a large, highly related POU-domain gene family, potentially exceeding 100 members, has been conserved and expanded in evolution to meet the increasing requirements for more intricate patterns of cell phenotypes. The POU-domain subgroup of the homeodomain gene family, in concert with other homeodomain proteins and with other classes of transcription factors, is likely to contribute to the establishment of the mammalian neuroendocrine system.