Notch signaling is involved in many developmental and pathological processes, and its activity must be precisely controlled in order to prevent aberrant development and disease. We have previously shown that the tumor suppressor gene lethal (2) giant discs (lgd) is required to prevent ectopic activation of Notch in developmental processes in Drosophila. Here we show that lgd is required in all imaginal disc cells to suppress the activity of the Notch pathway. lgd encodes a member of a poorly characterized protein family present in all animals, which includes a member that is involved in an inheritable form of mental retardation in humans. Our analysis reveals that Lgd is required for endosomal trafficking of Notch and other proteins. In the absence of Lgd, Notch is activated in a ligand-independent manner in probably all imaginal disc cells in an endosomal compartment downstream of the block in hrs mutants.