Caffeine is consumed worldwide to enhance wakefulness, but the cellular mechanisms are poorly understood. Caffeine blocks adenosine receptors suggesting that adenosine decreases cortical arousal. Given the widespread innervation of the cerebral cortex by thalamic fibers, adenosine receptors on thalamocortical terminals could provide an efficient method of limiting thalamic activation of the cortex. Using a mouse thalamocortical slice preparation and whole-cell patch clamp recordings, we examined whether thalamocortical terminals are modulated by adenosine receptors. Bath application of adenosine decreased excitatory postsynaptic currents elicited by stimulation of the ventrobasal thalamus. Thalamocortical synapses onto inhibitory and excitatory neurons were equally affected by adenosine. Adenosine also increased the paired pulse ratio and the coefficient of variation of the excitatory postsynaptic currents, suggesting that adenosine decreased glutamate release. The inhibition produced by adenosine was reversed by a selective antagonist of adenosine A1 receptors (8-cyclopentyltheophylline) and mimicked by a selective A1 receptor agonist (N6-cyclopentyladenosine). Our results indicate that thalamocortical excitation is regulated by presynaptic adenosine A1 receptors and provide a mechanism by which increased adenosine levels can directly reduce cortical excitability.