During development of the C. elegans hermaphrodite gonad, two cells interact with each other, so that one chooses to become the anchor cell (AC) and the other becomes a ventral uterine precursor cell (VU). This interaction is mediated by the receptor LIN-12 and its apparent ligand LAG-2. We show that initially lin-12 and lag-2 are expressed in both cells, but prior to commitment, the expression patterns change in a reciprocal manner, so that lin-12 expression becomes restricted to the presumptive VU and lag-2 expression becomes restricted to the presumptive AC. In addition, lin-12 activity promotes expression of lin-12 and represses expression of lag-2. Furthermore, we show that positive autoregulation of lin-12 transcription in the presumptive VU is mediated by a cis-acting 5' regulatory sequence and is necessary to specify the VU fate. Our results suggest that transcriptional control is a component of the feedback mechanism involved in specifying the AC and VU fates.