In the Drosophila larva, blood cells or hemocytes are formed in the lymph gland. The major blood cell type, called plasmatocyte, is small, non-adhesive and phagocytic. Plasmatocytes differentiate into adhesive lamellocytes to form multilayered capsules around foreign substances or, in mutant melanotic tumor strains, around self tissue. Mutations in cactus or Toll, or constitutive expression of dorsal can induce lamellocyte differentiation and cause the formation of melanotic capsules. As maternally encoded proteins, Toll, Cactus and Dorsal, along with Tube and Pelle, participate in a common signal transduction pathway to specify the embryonic dorsal-ventral axis. Using the maternal pathway as a paradigm, we investigated if these proteins have additional roles in larval hemocyte formation and differentiation. Analysis of cactus mutants that lack Cactus protein revealed that almost all of these animals have an overabundance of hemocytes, carry melanotic capsules and die before reaching pupal stages. In addition, the lymph glands of cactus larvae are considerably enlarged. The number of mitotic cells in the cactus and TollD hemolymph is higher than that in the wild-type hemolymph. The hemocyte density of mutant Toll, tube or pelle hemolymph is significantly lower than that of the wild type. Lethality of mutant cactus animals could be rescued either by the selective expression of wild-type Cactus protein in the larval lymph gland or by the introduction of mutations in Toll, tube or pelle. Cactus, Toll, Tube and Pelle proteins are expressed in the nascent hemocytes of the larval lymph gland. Our results suggest that the Toll/Cactus signal transduction pathway plays a significant role in regulating hemocyte proliferation and hemocyte density in the Drosophila larva. These findings are discussed in light of similar hematopoietic functions of Rel/I(kappa)B-family proteins in mice.