Magnocellular regions of the basal forebrain (BF) are recognized as important sites of sleep-wake regulation. Evidence is reviewed for the coexistence within the BF of mechanisms that regulate neocortical and limbic system arousal along with mechanisms that promote sleep. Arousal-related functions are mediated by a system of magnocellular cholinergic neurons. BF cholinergic neurons project monosynaptically to the entire neocortex and limbic telencephalon, exert excitatory effects on target cells and participate in the regulation of activated EEG patterns characteristic of waking and REM sleep. Evidence suggests that, within the waking state, the BF cholinergic system modulates processing of sensory information in the neocortex and is involved in cognitive processes. One or more noncholinergic cell types are responsible for the sleep-promoting functions of the BF. Neurons that display elevated discharge rates during transitions from waking to sleep and during nonREM sleep have been recorded in BF sites were electrical stimulation evokes sleep and experimental lesions cause insomnia. BF neurons function to promote sleep, in part, via descending inhibition of caudal hypothalamic and brainstem activating systems. GABAergic neurons located within magnocellular regions of the BF are hypothesized to mediate sleep-promoting actions. Afferents to the BF from hypothalamic and brainstem regions are functionally important for sleep-wake regulation. Thermosensitive inputs from the anterior hypothalamus modulate the activity of BF sleep- and arousal-related cell types. Excitatory effects of brainstem inputs to BF arousal-related cells have been documented. Additional evidence supports a critical role for GABAergic-cholinergic interactions, both within the magnocellular BF and at cortical and diencephalic sites, in the regulation of behavioral state.