The LHX3 LIM homeodomain transcription factor is required for pituitary development and motor neuron specification. The Lhx3 gene encodes two isoforms, LHX3a and LHX3b, that differ in their amino-terminal sequences. Humans and mice with defective Lhx3 genes are deficient in gonadotrope, lactotrope, somatotrope, and thyrotrope pituitary cells. We show that, whereas Lhx3b is highly expressed in these Lhx3-dependent cell types, high levels of Lhx3a expression are restricted to alpha glycoprotein subunit-expressing thyrotropes and gonadotropes. Cross-species comparison reveals the LHX3b-specific domain is more conserved than the LHX3a-specific domain. We demonstrate that the LHX3b-specific domain is a transferable inhibitor that reduces gene activation and DNA binding by homeodomain proteins. In addition, we identify a novel LHX3 protein (M2-LHX3) and determine that this molecule is generated by an internal translation initiation codon. The LHX3a- and LHX3b-specific coding sequences regulate differential usage of this internal start codon. Further, we identify the major activation domain of LHX3 in the carboxyl terminus of the molecule. M2-LHX3 is active because it retains this domain and binds DNA better than LHX3a or LHX3b. Other LIM homeodomain genes, including Lhx4, generate similar truncated proteins. These studies describe how transcriptional regulatory genes can generate multiple functional proteins.