Paneth cells represent one of the four major epithelial lineages in the mouse small intestine. It is the only lineage that migrates downward from the stem-cell zone located in the lower portion of the crypt of Lieberkühn to the crypt base. Mature Paneth cells release growth factors, digestive enzymes, and antimicrobial peptides from their apical secretory granules. Some of these factors may affect the crypt stem cell, its transit-cell descendants, differentiating villus-associated epithelial lineages, and/or the gut microflora. We used single and multilabel immunocytochemical methods to study Paneth cell differentiation during and after completion of gut morphogenesis in normal, gnotobiotic, and transgenic mice as well as in intestinal isografts. This lineage emerges coincident with cytodifferentiation of the fetal small intestinal endoderm, formation of crypts from an intervillus epithelium, and establishment of a stem-cell hierarchy. The initial differentiation program involves sequential expression of cryptdins, a phospholipase A2 (enhancing factor), and lysozyme. A dramatic increase in Paneth cell number per crypt occurs during postnatal days 14-28, when crypts proliferate by fission. Accumulation of fucosylated and sialylated glycoconjugates during this period represents the final evolution of the lineage's differentiation program. Establishment of this lineage is not dependent upon instructive interactions from the microflora. Transgenic mice containing nucleotides -6500 to +34 of the Paneth cell-specific mouse cryptdin 2 gene linked to the human growth hormone gene beginning at its nucleotide +3 inappropriately express human growth hormone in a large population of proliferating and nonproliferating cells in the intervillus epithelium up to postnatal day 5. Transgene expression subsequently becomes restricted to the Paneth cell lineage in the developing crypt. Cryptdin 2 nucleotides -6500 to +34 should be a useful marker of crypt morphogenesis and a valuable tool for conducting gain-of-function or loss-of-function experiments in Paneth cells.