The active moiety of clozapine, the prototypical antipsychotic drug, consists of clozapine and its major metabolite, N-desmethylclozapine (NDMC). Previous studies have suggested that NDMC may be more important than the patent compound itself for the improvement in cognition in patients with schizophrenia treated with clozapine. While the pharmacology of clozapine and NDMC are similar in most respects, NDMC has been shown to be an M1 muscarinic receptor partial agonist whereas clozapine is an M1 antagonist in vitro and in vivo. We hypothesized that NDMC may improve cognition by increasing dopamine (DA) and acetylcholine (ACh) release in medial prefrontal cortex (mPFC) via direct stimulation of M1 receptors, whereas both NDMC and clozapine itself would do so by other mechanisms as well, and that clozapine would inhibit the M1 agonist effect of NDMC. In the present study, using microdialysis in awake, freely moving rats, we found that NDMC at doses of 10 and 20, but not 5 mg/kg, significantly increased DA and ACh release in the mPFC and HIP, but not in the nucleus accumbens (NAC). The M1-preferring antagonist, telenzepine (3 mg/kg), completely blocked NDMC (10 mg/kg)-induced increases in cortical DA and ACh release. Clozapine (1.25 mg/kg), which by itself had no effect on DA or ACh release in the cortex, blocked NDMC (10 mg/kg)-induced ACh, but not DA, release in the mPFC. The 5-HT1A receptor antagonist, WAY100635 (0.2 mg/kg) blocked NDMC (20 mg/kg)-induced cortical DA but not ACh release. These findings suggest that: (1) NDMC is an M1 agonist while clozapine is an M1 antagonist in vivo; (2) M1 agonism of NDMC can contribute to the release of cortical ACh and DA release; (3) NDMC, because of its M1 agonism, may more effectively treat the cognitive impairments observed in schizophrenia than clozapine itself; and (4) M1 receptor agonism may be a valuable target for the development of drugs that can improve cognitive deficit in schizophrenia, and perhaps other neuropsychiatric disorders as well.