The nature and mechanisms of septohippocampal transmission have been elucidated by taking advantage of an in situ preparation in experiments with Sprague–Dawley rats under urethane. Both extracellular field potentials and intracellular recordings were made in CA1–3 regions of the hippocampus; and the hippocampal commissure and medial septum stimulated to evoke synaptic activity. Using muscarinic and nicotinic agonists and antagonists it was shown that both acetylcholine and medial septal activity can increase the excitability of pyramidal cells, mainly through muscarinic receptors. The effect of septal stimulation was enhanced by local application of physostigmine and reduced by intraventricular injections of hemicholinium. It was also shown that acetylcholine, when applied in the stratum pyramidale, can reduce the voltage and conductance changes observed during evoked inhibitory postsynaptic potentials (IPSP) without affecting the action of γ-aminobutyric acid on membrane conductance and voltage. It is therefore proposed that acetylcholine can reduce evoked IPSPs through presynaptic inhibition. Evidence is also presented that medial septal stimulation can reduce the efficacy of evoked IPSPs. These observations provide further support for the existence of a cholinergic septohippocampal pathway.