The Insulin Receptor (InR) in Drosophila presents features conserved in its mammalian counterparts. InR is required for growth; it is expressed in the central and embryonic nervous system and modulates the time of differentiation of the eye photoreceptor without altering cell fate. We show that the InR is required for the formation of the peripheral nervous system during larval development and more particularly for the formation of sensory organ precursors (SOPs) on the fly notum and scutellum. SOPs arise in the proneural cluster that expresses high levels of the proneural proteins Achaete (Ac) and Scute (Sc). The other cells will become epidermis due to lateral inhibition induced by the Notch (N) receptor signal that prevents its neighbors from adopting a neural fate. In addition, misexpression of the InR or of other components of the pathway (PTEN, Akt, FOXO) induces the development of an abnormal number of macrochaetes that are Drosophila mechanoreceptors. Our data suggest that InR regulates the neural genes ac, sc and sens. The FOXO transcription factor which is localized in the cytoplasm upon insulin uptake, displays strong genetic interaction with the InR and is involved in Ac regulation. The genetic interactions between the epidermal growth factor receptor (EGFR), Ras and InR/FOXO suggest that these proteins cooperate to induce neural gene expression. Moreover, InR/FOXO is probably involved in the lateral inhibition process, since genetic interactions with N are highly significant. These results show that the InR can alter cell fate, independently of its function in cell growth and proliferation.