Cells located at the midline of the developing central nervous system perform a number of conserved functions during the establishment of the lateral CNS. The midline cells of the Drosophila CNS were previously shown to be required for correct pattern formation in the ventral ectoderm and for the induction of specific mesodermal cells. Here we investigated whether the midline cells are required for the correct development of lateral CNS cells as well. Embryos that lack midline cells through genetic ablation show a 15% reduction in the number of cortical CNS cells. A similar thinning of the ventral nerve cord can be observed following mechanical ablation of the midline cells. We have identified a number of specific neuronal and glial cell markers that are reduced in CNS midline-less embryos (in single-minded embryos, in early heat-shocked Notch(ts1) embryos or in embryos where we mechanically ablated the midline cells). Genetic data suggest that both neuronal and glial midline cell lineages are required for differentiation of lateral CNS cells. We could rescue the lateral CNS phenotype of single-minded mutant embryos by transplantation of midline cells as well as by homotopic expression of single-minded, the master gene for midline development. Furthermore, ectopic midline cells are able to induce enhanced expression of some lateral CNS cell markers. We thus conclude that the CNS midline plays an important role in the differentiation or maintenance of the lateral CNS cortex.