We have examined the process by which cell diversity is generated in neuroblast (NB) lineages in the central nervous system of Drosophila melanogaster. Thoracic NB6-4 (NB6-4t) generates both neurons and glial cells, whereas NB6-4a generates only glial cells in abdominal segments. This is attributed to an asymmetric first division of NB6-4t, localizing prospero (pros) and glial cell missing (gcm) only to the glial precursor cell, and a symmetric division of NB6-4a, where both daughter cells express pros and gcm. Here we show that the NB6-4t lineage represents the ground state, which does not require the input of any homeotic gene, whereas the NB6-4a lineage is specified by the homeotic genes abd-A and Abd-B. They specify the NB6-4a lineage by down-regulating levels of the G1 cyclin, DmCycE (CycE). CycE, which is asymmetrically expressed after the first division of NB6-4t, functions upstream of pros and gcm to specify the neuronal sublineage. Loss of CycE function causes homeotic transformation of NB6-4t to NB6-4a, whereas ectopic CycE induces reverse transformations. However, other components of the cell cycle seem to have a minor role in this process, suggesting a critical role for CycE in regulating cell fate in segment-specific neural lineages.