Cells in the neuroectoderm of Drosophila become either neural or epidermal progenitors. A critical threshold concentration of proneural gene products in a given cell causes it to develop as a neuroblast. The proteins encoded by the genes Delta (Dl) and Notch (N) act as the source and the receptor, respectively, of inhibitory signals sent by the neuroblast to neighboring cells that prevent these cells from also adopting the neural fate. We show here that proneural gene products activate transcription of Delta in the neuroectoderm by binding to specific sites in its promoter. This transcriptional activation enhances lateral inhibition and thus helps ensure that cells in the vicinity of prospective neuroblasts will themselves become epidermoblasts.