Caspases are well known for their role in the execution of apoptotic programs, in which they cleave specific target proteins, leading to the elimination of cells, and for their role in cytokine maturation. In this study, we identified a novel substrate, which, through cleavage by caspases, can regulate Drosophila neural precursor development. Shaggy (Sgg)46 protein, an isoform encoded by the sgg gene and essential for the negative regulation of Wingless signaling, is cleaved by the Dark-dependent caspase. This cleavage converts it to an active kinase, which contributes to the formation of neural precursor (sensory organ precursor (SOP)) cells. Our evidence suggests that caspase regulation of the wingless pathway is not associated with apoptotic cell death. These results imply a novel role for caspases in modulating cell signaling pathways through substrate cleavage in neural precursor development.