Delta proteins function as cell surface ligands for Notch receptors in a highly conserved signal transduction mechanism. Delta activates Notch by “trans-endocytosis”, whereby endocytosis of Delta that is in complex with Notch on a neighboring cell induces activating cleavages in Notch. Alternatively, proteolysis of Delta renders the ligand inactive by dissociating the extracellular and cytosolic domains. How proteolysis and trans-endocytosis cooperate in Delta function is not well understood. We now show that Drosophila Delta proteolysis occurs independent of and prior to endocytosis in neuroblasts and ganglion mother cells in vivo and cells in culture. Delta cleavage occurs at two novel sites that we identify in the juxtamembrane (JM) and transmembrane (TM) domains. In addition to the previously identified Kuzbanian ADAM protease, which acts on the JM domain, proteolysis in the TM domain is facilitated by a thiol-sensitive aspartyl protease that is distinct from Presenilin. Furthermore, cleavage in the TM domain is upregulated in the presence of Notch. Overall, Drosophila Delta proteolysis differs from the conventional regulated intramembrane proteolysis (RIP) mechanism by two criteria: (1) TM-domain processing of Delta is not sensitive to Presenilin, and (2) TM and JM domain cleavages occur independently of each other. Altogether, these data support a model whereby proteolysis can modulate Delta ligand activity independently of endocytosis.