Notch and Delta are required for lateral inhibition during eye development. They prevent a tenfold excess in R8 photoreceptor cell specification. Mutations in two other genes, Scabrous and Gp150, result in more modestly increased R8 specification. Their roles in Notch signaling have been unclear. Both sca and gp150 are required for ectopic Notch activity that occurs in the split mutant. Similar phenotypes showed that sca and gp150 genes act in a common pathway. Gp150 was required for all activities of Sca, including inhibition of Notch activity and association with Notch-expressing cells that occur when Sca is ectopically expressed. Mosaic analysis found that the gp150 and sca genes were required in different cells from one another. Gp150 concentrated Sca protein in late endosomes. A model is proposed in which endosomal Sca and Gp150 promote Notch activation in response to Delta, by regulating acquisition of insensitivity to Delta in a subset of cells.