The Notch family of genes has been implicated in specifying cell fates during hair follicle morphogenesis. We examined Notch gene expression during wool follicle formation, as an understanding of genes that influence cell distributions in the developing follicle is a prerequisite for devising molecular strategies to manipulate fibre characters and follicle density. We identified transcripts for the Notch1 receptor and one of its ligands, Jagged1, in fetal sheep skin by reverse transcriptase polymerase chain reaction. The sheep-specific cDNA sequences were used as templates to produce probes to investigate the expression patterns of Notch1 and Jagged1 in developing ovine fetal skin by in situ hybridisation. Notch1 and Jagged1 were detected in the epidermis and in a subpopulation of mesenchymal cells before follicle initiation. At day 70 during follicle initiation, transcripts were also detected in cells at the tip of the epidermal plug and in dermal condensates. By day 86, Notch1 and Jagged1 were detected in the distal cells of the epidermal downgrowths and epidermis and Notch1 was no longer detected in the mesenchyme and dermal condensates. After day 96, transcripts were absent from the epidermis, but localised to differentiating outer root sheath (ORS) cells. The distributions of transcripts implicate a Notch1–Jagged1 signal pathway in the fates of prospective ORS cells. The transient appearance of Notch1 in cells at the epidermal–mesenchymal junction during early follicle morphogenesis suggests that the receptor may be responsible for the specification of a cell subpopulation committed to a prepapilla fate at initiation.