During Drosophila external sensory organ development, one sensory organ precursor (SOP) arises from a proneural cluster, and undergoes asymmetrical cell divisions to produce an external sensory (es) organ made up of different types of daughter cells. We show that phyllopod (phyl), previously identified to be essential for R7 photoreceptor differentiation, is required in two stages of es organ development: the formation of SOP cells and cell fate specification of SOP progeny. Loss-of-function mutations in phyl result in failure of SOP formation, which leads to missing bristles in adult flies. At a later stage of es organ development, phyl mutations cause the first cell division of the SOP lineage to generate two identical daughters, leading to the fate transformation of neurons and sheath cells to hair cells and socket cells. Conversely, misexpression of phyl promotes ectopic SOP formation, and causes opposite fate transformation in SOP daughter cells. Thus, phyl functions as a genetic switch in specifying the fate of the SOP cells and their progeny. We further show that seven in absentia (sina), another gene required for R7 cell fate differentiation, is also involved in es organ development. Genetic interactions among phyl, sina and tramtrack (ttk) suggest that phyl and sina function in bristle development by antagonizing ttk activity, and ttk acts downstream of phyl. It has been shown previously that Notch (N) mutations induce formation of supernumerary SOP cells, and transformation from hair and socket cells to neurons. We further demonstrate that phyl acts epistatically to N. phyl is expressed specifically in SOP cells and other neural precursors, and its mRNA level is negatively regulated by N signaling. Thus, these analyses demonstrate that phyl acts downstream of N signaling in controlling cell fates in es organ development.