During neurogenesis in Drosophila, groups of equipotential, neurally competent cells choose between epidermal and neural fates. Notch, a phylogenetically conserved transmembrane protein, may act as a receptor in a lateral signalling pathway in which a single neural precursor is chosen from each group and the neural fate of the other cells is inhibited, causing them to differentiate into epidermis. Possible intracellular transduction events mediating signals from Notch are, however, unknown. shaggy is also required for the lateral signal and encodes serine/threonine protein kinases with homology to the glycogen synthase kinase-3 (GSK-3) enzymes that act in signal transduction pathways in vertebrates. We report here that, in transgenic flies, GSK-3 beta can substitute for shaggy, and we also present a study of epistatic relationships between shaggy and gain and loss of function alleles of Notch. The results indicate that shaggy/GSK-3 is part of a signalling pathway downstream of Notch.