The slow (<1 Hz) oscillation, with its alternating 'up' and 'down' states in individual neurons, is a defining feature of the electroencephalogram (EEG) during slow-wave sleep (SWS). Although this oscillation is well preserved across mammalian species, its physiological role is unclear. Electrophysiological and computational evidence from the cortex and thalamus now indicates that slow-oscillation 'up' states and the 'activated' state of wakefulness are remarkably similar dynamic entities. This is consistent with behavioural experiments suggesting that slow-oscillation 'up' states provide a context for the replay, and possible consolidation, of previous experience. In this scenario, the T-type Ca(2+) channel-dependent bursts of action potentials that initiate each 'up' state in thalamocortical (TC) neurons might function as triggers for synaptic and cellular plasticity in corticothalamic networks. This review is part of the INMED/TINS special issue Physiogenic and pathogenic oscillations: the beauty and the beast, based on presentations at the annual INMED/TINS symposium (http://inmednet.com).