The mammalian auditory sensory epithelium, the organ of Corti, contains sensory hair cells and nonsensory supporting cells arranged in a highly patterned mosaic. Notch-mediated lateral inhibition is the proposed mechanism for creating this sensory mosaic. Previous work has shown that mice lacking the Notch ligand JAG2 differentiate supernumerary hair cells in the cochlea, consistent with the lateral inhibitory model. However, it was not clear why only relatively modest increases in hair cell production were observed in Jag2 mutant mice. Here, we show that another Notch ligand, DLL1, functions synergistically with JAG2 in regulating hair cell differentiation in the cochlea. We also show by conditional inactivation that these ligands probably signal through the NOTCH1 receptor. Supernumerary hair cells in Dll1/Jag2 double mutants arise primarily through a switch in cell fate, rather than through excess proliferation. Although these results demonstrate an important role for Notch-mediated lateral inhibition during cochlear hair cell patterning, we also detected abnormally prolonged cellular proliferation that preferentially affected supporting cells in the organ of Corti. Our results demonstrate that the Notch pathway plays a dual role in regulating cellular differentiation and patterning in the cochlea, acting both through lateral inhibition and the control of cellular proliferation.