We used a synthetic genetic system based on ligand-induced intramembrane proteolysis to monitor cell-cell contacts in animals. Upon ligand-receptor interaction in sites of cell-cell contact, the transmembrane domain of an engineered receptor is cleaved by intramembrane proteolysis and releases a protein fragment that regulates transcription in the interacting partners. We demonstrate that the system can be used to regulate gene expression between interacting cells, both in vitro and in vivo, in transgenic Drosophila We show that the system allows for detection of interactions between neurons and glia in the Drosophila nervous system. In addition, we observed that when the ligand is expressed in subsets of neurons with a restricted localization in the brain it leads to activation of transcription in a selected set of glial cells that interact with those neurons. This system will be useful to monitor cell-cell interactions in animals, and can be used to genetically manipulate cells that interact with one another.