Up-/down-state transitions are a form of network activity observed when sensory input into the cortex is diminished such as during non-REM sleep. Up-states emerge from coordinated signaling between glutamatergic and GABAergic synapses and are modulated by systems that affect the balance between inhibition and excitation. We hypothesized that the endocannabinoid (EC) system, a neuromodulatory system intrinsic to the cortical microcircuitry, is an important regulator of up-states and sleep. To test this hypothesis, up-states were recorded from layer V/VI pyramidal neurons in organotypic cultures of wild-type or CB1R knockout (KO) mouse prefrontal cortex. Activation of the cannabinoid 1 receptor (CB1) with exogenous agonists or by blocking metabolism of endocannabinoids, anandamide or 2-arachidonoyl glycerol, increased up-state amplitude and facilitated action potential discharge during up-states. The CB1 agonist also produced a layer II/III-selective reduction in synaptic GABAergic signaling that may underlie its effects on up-state amplitude and spiking. Application of CB1 antagonists revealed that an endogenous EC tone regulates up-state duration. Paradoxically, the duration of up-states in CB1 KO cultures was increased suggesting that chronic absence of EC signaling alters cortical activity. Consistent with increased cortical excitability, CB1 KO mice exhibited increased wakefulness as a result of reduced NREM sleep and NREM bout duration. Under baseline conditions, NREM delta (0.5-4 Hz) power was not different in CB1 KO mice, but during recovery from forced sleep deprivation, KO mice had reduced NREM delta power and increased sleep fragmentation. Overall, these findings demonstrate that the EC system actively regulates cortical up-states and important features of NREM sleep such as its duration and low frequency cortical oscillations.