Maternal and zygotic activities of the homeodomain protein PAL-1 specify the identity and maintain the development of the multipotent C blastomere lineage in the C. elegans embryo. To identify PAL-1 regulatory target genes, we used microarrays to compare transcript abundance in wild-type embryos with mutant embryos lacking a C blastomere and to mutant embryos with extra C blastomeres. pal-1-dependent C-lineage expression was verified for select candidate target genes by reporter gene analysis, though many of the target genes are expressed in additional lineages as well. The set of validated target genes includes 12 transcription factors, an uncharacterized wingless ligand and five uncharacterized genes. Phenotypic analysis demonstrates that the identified PAL-1 target genes affect specification, differentiation and morphogenesis of C-lineage cells. In particular, we show that cell fate-specific genes (or tissue identity genes) and a posterior HOX gene are activated in lineage-specific fashion. Transcription of targets is initiated in four temporal phases, which together with their spatial expression patterns leads to a model of the regulatory network specified by PAL-1.