Multipotent progenitor cells in the otic placode give rise to the specialized cell types of the inner ear, including neurons, supporting cells and hair cells. The mechanisms governing acquisition of specific fates by the cells that form the cochleovestibular organs remain poorly characterized. Here we show that whereas blocking Notch signaling with a γ-secretase inhibitor increased the conversion of inner ear stem cells to hair cells by a mechanism that involved the upregulation of bHLH transcription factor, Math1 (mouse Atoh1), differentiation to a neuronal lineage was increased by expression of the Notch intracellular domain. The shift to a neuronal lineage could be attributed in part to the continued cell proliferation in cells that did not undergo sensory cell differentiation due to the high Notch signaling, but also involved upregulation of Ngn1. The Notch intracellular domain influenced Ngn1 indirectly by upregulation of Sox2, a transcription factor expressed in many neural progenitor cells, and directly by an interaction with an RBP-J binding site in the Ngn1 promoter/enhancer. The induction of Ngn1 was blocked partially by mutation of the RBP-J site and nearly completely when the mutation was combined with inhibition of Sox2 expression. Thus Notch signaling had a significant role in the fate specification of neurons and hair cells from inner ear stem cells, and decisions about cell fate were mediated in part by a differential effect of combinatorial signaling by Notch and Sox2 on the expression of bHLH transcription factors.