Mind bomb1 (Mib1)-mediated endocytosis of the Notch ligand DeltaD is essential for activation of Notch in a neighboring cell. Although most DeltaD is localized in cytoplasmic puncta in zebrafish neural tissue, it is on the plasma membrane in mib1 mutants because Mib1-mediated endocytosis determines the normal subcellular localization of DeltaD. Knockdown of Notch increases cell surface DeltaA and DeltaD, but not DeltaC, suggesting that, like Mib1, Notch regulates endocytosis of specific ligands. Transplant experiments show that the interaction with Notch, both in the same cell (in cis) and in neighboring cells (in trans), regulates DeltaD endocytosis. Whereas DeltaD endocytosis following interaction in trans activates Notch in a neighboring cell, endocytosis of DeltaD and Notch following an interaction in cis is likely to inhibit Notch signaling by making both unavailable at the cell surface. The transplantation experiments reveal a heterogeneous population of progenitors: in some, cis interactions are more important; in others, trans interactions are more important; and in others, both cis and trans interactions are likely to contribute to DeltaD endocytosis. We suggest that this heterogeneity represents the process by which effective lateral inhibition leads to diversification of progenitors into cells that become specialized to deliver or receive Delta signals, where trans and cis interactions with Notch play differential roles in DeltaD endocytosis.