A newly described synaptic action of serotonin (5-HT) in the cerebral cortex is reviewed, and implications for mood and psychosis are discussed. Recordings in brain slices show that 5-HT induces a rapid increase in excitatory postsynaptic potentials/currents (EPSPs/EPSCs) in virtually all layer V pyramidal cells of neocortex. This effect is mediated by the 5-HT2A receptor, which has been linked to the action of hallucinogenic and atypical antipsychotic drugs. The increase in EPSCs is seen most prominently in medial prefrontal cortex and other frontal regions where 5-HT2A receptors are enriched. The induction of EPSCs by 5-HT appears to occur through a novel mechanism that does not depend on the activation of afferent impulse flow. Instead, 5-HT appears to act presynaptically, directly or indirectly, to induce a focal release of glutamate from a subpopulation of glutamatergic terminals impinging upon the apical (but not basilar) dendrites of layer V pyramidal cells; a working hypothesis of the transduction pathway (involving asynchronous transmitter release) for this process is presented. Consistent with a focal action upon glutamatergic nerve terminals, the 5-HT-induced EPSPs can be suppressed by presynaptic inhibitory modulators such as mu-opiate or group II/III metabotropic agonists. We suggest that the suppression of 5-HT-induced EPSCs by 5-HT2A antagonists and mu-opiate agonists may underlie certain shared clinical effects of 5-HT2A antagonists and mu-opiate agonists. We suggest further that since presynaptic group II/III metabotropic glutamate agonists suppress 5-HT-induced EPSCs, metabotropic glutamate agonists may also possess antidepressant and/or antipsychotic properties.