The basal forebrain constitutes the ventral extra-thalamic relay from the brainstem activating system to the cerebral cortex. Cholinergic neurons form an important contingent of this relay, yet represent only a portion of the cortically projecting and other basal forebrain neurons, which include GABAergic neurons. By recording, labeling and identifying neurons by their neurotransmitter first in vitro and then in vivo, we have determined that the cholinergic neurons have different physiological and pharmacological properties than other codistributed neurons. Cholinergic neurons discharge at higher rates during cortical activation than during cortical slow wave activity, and are excited by transmitters released from brainstem afferent neurons, including glutamate from reticular formation, noradrenaline (NA) from locus coeruleus, and orexin and histamine from posterior hypothalamus. In contrast, particular GABAergic neurons discharge at higher rates during cortical slow wave activity and are inhibited by NA. When NA is administered into the basal forebrain in naturally sleeping-waking rats, it elicits an increase in fast gamma EEG activity and diminution of slow delta EEG activity while promoting waking and eliminating slow wave sleep (SWS). Cholinergic neurons also have the capacity to discharge in rhythmic bursts when activated by particular agonists, notably neurotensin (NT). When NT is administered into the basal forebrain, it stimulates theta activity in addition to gamma while promoting waking and paradoxical sleep (PS). By increasing discharge and firing in rhythmic bursts in response to transmitters of the activating systems, cholinergic neurons can thus stimulate cortical activation with gamma and theta activity along with the states of waking and PS. Colocalized GABAergic basal forebrain neurons which are inhibited by transmitters of the arousal systems can oppose these actions and promote delta activity and SWS.