Leukocyte-like cells called hemocytes have key functions in Drosophila innate immunity. Three hemocyte types occur: plasmatocytes, crystal cells, and lamellocytes. In the absence of qimmune challenge, plasmatocytes are the predominant hemocyte type detected, while crystal cells and lamellocytes are rare. However, upon infestation by parasitic wasps, or in melanotic mutant strains, large numbers of lamellocytes differentiate and encapsulate material recognized as "non-self". Current models speculate that lamellocytes, plasmatocytes and crystal cells are distinct lineages that arise from a common prohemocyte progenitor. We show here that over-expression of the CoREST-interacting transcription factor Chn in plasmatocytes induces lamellocyte differentiation, both in circulation and in lymph glands. Lamellocyte increases are accompanied by the extinction of plasmatocyte markers suggesting that plasmatocytes are transformed into lamellocytes. Consistent with this, timed induction of Chn over-expression induces rapid lamellocyte differentiation within 18 hours. We detect double-positive intermediates between plasmatocytes and lamellocytes, and show that isolated plasmatocytes can be triggered to differentiate into lamellocytes in vitro, either in response to Chn over-expression, or following activation of the JAK/STAT pathway. Finally, we have marked plasmatocytes and show by lineage tracing that these differentiate into lamellocytes in response to the Drosophila parasite model Leptopilina boulardi. Taken together, our data suggest that lamellocytes arise from plasmatocytes and that plasmatocytes may be inherently plastic, possessing the ability to differentiate further into lamellocytes upon appropriate challenge.