The cholinergic hypothesis of geriatric memory dysfunction suggests (a) that basal forebrain lesions in animals should mimic cognitive and mnemonic impairments of human dementia and (b) that cholinergic grafts in the cortex and hippocampus may alleviate such impairments, whether induced by basal forebrain lesions or due to the intrinsic processes of ageing. Our own studies addressing these issues are reviewed. Although aged rats manifest impairments in short-term memory that are reversed by cholinergic grafts in the cortex and hippocampus, basal forebrain lesions have produced ambiguous results, which in part are attributable to nonspecific effects of the lesions. Acetylcholinesterase histochemistry and the topography of NBM-cortical connections indicate that basal forebrain lesions that include the NBM in general spare the cholinergic innervation of the prefrontal cortex, but can damage prefrontal cortical outflows via the globus pallidus. Two experiments are presented to indicate that the medial prefrontal cortex and its ventral striatal outputs provide a critical substrate for normal short-term memory performance in delayed matching and nonmatching tasks. These observations can resolve many of the discrepancies in previous lesion and graft studies.