The development of the nervous system requires the coordinated activity of a variety of regulatory factors that define the individual properties of specific neuronal subtypes. We report a regulatory cascade composed of three homeodomain proteins that act to define the properties of a specific interneuron class in the nematode C. elegans. We describe a set of differentiation markers characteristic for the AIY interneuron class and show that the ceh-10 paired-type and ttx-3 LIM-type homeobox genes function to regulate all known subtype-specific features of the AIY interneurons. In contrast, the acquisition of several pan-neuronal features is unaffected in ceh-10 and ttx-3 mutants, suggesting that the activity of these homeobox genes separates pan-neuronal from subtype-specific differentiation programs. The LIM homeobox gene ttx-3 appears to play a central role in regulation of AIY differentiation. Not only are all AIY subtype characteristics lost in ttx-3 mutants, but ectopic misexpression of ttx-3 is also sufficient to induce AIY-like features in a restricted set of neurons. One of the targets of ceh-10 and ttx-3 is a novel type of homeobox gene, ceh-23. We show that ceh-23 is not required for the initial adoption of AIY differentiation characteristics, but instead is required to maintain the expression of one defined AIY differentiation feature. Finally, we demonstrate that the regulatory relationship between ceh-10, ttx-3 and ceh-23 is only partially conserved in other neurons in the nervous system. Our findings illustrate the complexity of transcriptional regulation in the nervous system and provide an example for the intricate interdependence of transcription factor action.