Classical genetics indicates that the achaete-scute gene complex (AS-C) of Drosophila promotes development of neural progenitor cells. To further analyze the function of proneural genes, we have studied the effects of Gal4-mediated expression of lethal of scute, a member of the AS-C, during embryogenesis. Expression of lethal of scute forces progenitor cells of larval internal sensory organs, which are normally committed to this fate independently of the activity of the AS-C, to take on features of external sensory organs. Supernumerary neural cells can be induced ectopically only if daughterless is overexpressed, either alone or together with lethal of scute: cells of the amnioserosa and the hindgut then express neuronal markers. Furthermore, cells of the proctodeal anlage, which normally lack neural competence, acquire the ability to develop as neuroblasts following transplantation into the neuroectoderm. We show here that activated Notch prevents the cells of the neuroectoderm from forming extra neural tissue when they express an excess of proneural proteins. Under the present conditions, lateral inhibition is thus dominant over the activity of proneural genes.