Encoding of olfactory information in insects occurs in the antennal lobe where the olfactory receptor neurons interact with projection neurons and local interneurons in a complex sensory processing circuitry. While several studies have addressed the developmental mechanisms involved in specification and connectivity of olfactory receptor neurons and projection neurons in Drosophila, the local interneurons are far less well understood.In this study, we use genetic marking techniques combined with antibody labelling and neuroblast ablation to analyse lineage specific aspects of local interneuron development. We find that a large set of local interneurons labelled by the GAL4-LN1 (NP1227) and GAL4-LN2 (NP2426) lines arise from the lateral neuroblast, which has also been shown to generate uniglomerular projection neurons. Moreover, we find that a remarkable diversity of local interneuron cell types with different glomerular innervation patterns and neurotransmitter expression derives from this lineage. We analyse the birth order of these two distinct neuronal types by generating MARCM (mosaic analysis with a repressible cell marker) clones at different times during larval life. This analysis shows that local interneurons arise throughout the proliferative cycle of the lateral neuroblast beginning in the embryo, while uniglomerular projection neurons arise later during the second larval instar. The lateral neuroblast requires the function of the cephalic gap gene empty spiracles for the development of olfactory interneurons. In empty spiracles null mutant clones, most of the local interneurons and lateral projection neurons are lacking. These findings reveal similarities in the development of local interneurons and projection neurons in the olfactory system of Drosophila.We find that the lateral neuroblast of the deutocerebrum gives rise to a large and remarkably diverse set of local interneurons as well as to projection neurons in the antennal lobe. Moreover, we show that specific combinations of these two neuron types are produced in specific time windows in this neuroblast lineage. The development of both these cell types in this lineage requires the function of the empty spiracles gene.