Notch and the disintegrin metalloprotease encoded by the kuzbanian(kuz) gene are both required for a lateral inhibition process during Drosophila neurogenesis. We show that a mutant KUZ protein lacking protease activity acts as a dominant-negative form in Drosophila. Expression of such a dominant-negative KUZ protein can perturb lateral inhibition in Xenopus, leading to the overproduction of primary neurons. This suggests an evolutionarily conserved role for KUZ. The Notch family of receptors are known to be processed into smaller forms under normal physiological conditions. We provide genetic and biochemical evidence that Notch is an in vivo substrate for the KUZ protease, and that this cleavage may be part of the normal biosynthesis of functional Notch proteins.