BACKGROUND: Neural stem cells generate all of the neurons and glial cells in the central nervous system, both during development and in the adult to maintain homeostasis. In the Drosophila optic lobe, neuroepithelial cells progress through two transient progenitor states, PI and PII, before transforming into neuroblasts. Here we analyse the role of Notch signalling in the transition from neuroepithelial cells to neuroblasts. RESULTS: We observed dynamic regulation of Notch signalling: strong activity in PI progenitors, low signalling in PII progenitors, and increased activity after neuroblast transformation. Ectopic expression of the Notch ligand Delta induced the formation of ectopic PI progenitors. Interestingly, we show that the E3 ubiquitin ligase, Neuralized, regulates Delta levels and Notch signalling activity at the transition zone. We demonstrate that the proneural transcription factor, Lethal of scute, is essential to induce expression of Neuralized and promote the transition from the PI progenitor to the PII progenitor state. CONCLUSIONS: Our results show dynamic regulation of Notch signalling activity in the transition from neuroepithelial cells to neuroblasts. We propose a model in which Lethal of scute activates Notch signalling in a non-cell autonomous manner by regulating the expression of Neuralized, thereby promoting the progression between different neural stem cell states.