Notch signaling mediates multiple developmental decisions in Drosophila. In this study, we have examined the role of Notch signaling in Drosophila larval optic lobe development. Loss of function in Notch or its ligand Delta leads to loss of the lamina and a smaller medulla. The neuroepithelial cells in the optic lobe in Notch or Delta mutant brains do not expand but instead differentiate prematurely into medulla neuroblasts, which lead to premature neurogenesis in the medulla. Clonal analyses of loss-of-function alleles for the pathway components, including N, Dl, Su(H), and E(spl)-C, indicate that the Delta/Notch/Su(H) pathway is required for both maintaining the neuroepithelial stem cells and inhibiting medulla neuroblast formation while E(spl)-C is only required for some aspects of the inhibition of medulla neuroblast formation. Conversely, Notch pathway overactivation promotes neuroepithelial cell expansion while suppressing medulla neuroblast formation and neurogenesis; numb loss of function mimics Notch overactivation, suggesting that Numb may inhibit Notch signaling activity in the optic lobe neuroepithelial cells. Thus, our results show that Notch signaling plays a dual role in optic lobe development, by maintaining the neuroepithelial stem cells and promoting their expansion while inhibiting their differentiation into medulla neuroblasts. These roles of Notch signaling are strikingly similar to those of the JAK/STAT pathway in optic lobe development, raising the possibility that these pathways may collaborate to control neuroepithelial stem cell maintenance and expansion, and their differentiation into the progenitor cells.