The telencephalic neuroepithelium (NE) of mammalian brain has an apical-basal polarity that is marked by the positioning of neural progenitors and adherens junctions on the apical/ventricular surface and the ascending of radial glia/progenitor fibers toward the pial/basal surface. The signaling pathway that establishes this apical-basal polarity of NE is not completely understood, but the Rho-family GTPase Cdc42 may play a critical role because it controls cadherin-based intercellular junctions and cell polarity in many species. Here, we tested this hypothesis by a conditional gene-targeting strategy by using the Foxg1-Cre line to delete Cdc42 in the telencephalic neural progenitors in mouse embryos. We found that Cdc42-deletion abolishes the apical localization of PAR6, aPKC, E-cadherin, β-catenin, and Numb proteins in the NE, and severely impairs the extension of nestin-positive radial fibers. Consequently, neural progenitors were scattered throughout the entire depth of the NE, and the Cdc42-deficient telencephalon failed to bulge or separate into two cerebral hemispheres, resulting in holoprosencephaly. However, neither the midline expression of Sonic hedgehog nor the dorso-ventral patterning of the telencephalon was affected by Cdc42-deletion. Taken together, these results indicate that Cdc42 has an essential role in establishing the apical-basal polarity of the telencephalic NE, which is needed for the expansion and bifurcation of cerebral hemispheres.