In the Drosophila antennal lobe, excitation can spread between glomerular processing channels. In this study, we investigated the mechanism of lateral excitation. Dual recordings from excitatory local neurons (eLNs) and projection neurons (PNs) showed that eLN-to-PN synapses transmit both hyperpolarization and depolarization, are not diminished by blocking chemical neurotransmission, and are abolished by a gap-junction mutation. This mutation eliminates odor-evoked lateral excitation in PNs and diminishes some PN odor responses. This implies that lateral excitation is mediated by electrical synapses from eLNs onto PNs. In addition, eLNs form synapses onto inhibitory LNs. Eliminating these synapses boosts some PN odor responses and reduces the disinhibitory effect of GABA receptor antagonists on PNs. Thus, eLNs have two opposing effects on PNs, driving both direct excitation and indirect inhibition. We propose that when stimuli are weak, lateral excitation promotes sensitivity, whereas when stimuli are strong, lateral excitation helps recruit inhibitory gain control.