As indicated by the profound cognitive impairments caused by cholinergic receptor antagonists, cholinergic neurotransmission has a vital role in cognitive function, specifically attention and memory encoding. Abnormally regulated cholinergic neurotransmission has been hypothesized to contribute to the cognitive symptoms of neuropsychiatric disorders. Loss of cholinergic neurons enhances the severity of the symptoms of dementia. Cholinergic receptor agonists and acetylcholinesterase inhibitors have been investigated for the treatment of cognitive dysfunction. Evidence from experiments using new techniques for measuring rapid changes in cholinergic neurotransmission provides a novel perspective on the cholinergic regulation of cognitive processes. This evidence indicates that changes in cholinergic modulation on a timescale of seconds is triggered by sensory input cues and serves to facilitate cue detection and attentional performance. Furthermore, the evidence indicates cholinergic induction of evoked intrinsic, persistent spiking mechanisms for active maintenance of sensory input, and planned responses. Models have been developed to describe the neuronal mechanisms underlying the transient modulation of cortical target circuits by cholinergic activity. These models postulate specific locations and roles of nicotinic and muscarinic acetylcholine receptors and that cholinergic neurotransmission is controlled in part by (cortical) target circuits. The available evidence and these models point to new principles governing the development of the next generation of cholinergic treatments for cognitive disorders.