Acetylcholine is a major neurotransmitter that modulates cortical functions. In addition to basal forebrain neurons that give rise to the principal cholinergic input into the cortex, a second source constituted by intrinsic cholinergic interneurons has been identified. Although these cells have been characterized anatomically, little is known about their functional role in cortical microcircuits. The paucity of this cell population has been a major hindrance for detailed electrophysiological investigations. To facilitate functional studies, we generated transgenic mice that express enhanced green fluorescent protein (EGFP) in choline acetyltransferase (ChAT)-positive neurons. Aided by the transgene expression, the characterization of distinct cholinergic interneurons was possible. These cells were located in layer 2-3, had a bipolar morphology, were calretinin- and vasoactive intestinal peptide positive, but had a non-GABAergic phenotype. Paired recordings showed that EGFP/ChAT-positive neurons receive excitatory and inhibitory input from adjacent principal cells and various types of interneurons. However, EGFP/ChAT-positive neurons do not exert direct postsynaptic responses in neighboring neurons. Interestingly, prolonged activation of EGFP-labeled cholinergic neurons induces an increase in spontaneous EPSCs in adjacent pyramidal neurons. This indirect effect is mediated by nicotinic receptors that are presumably presynaptically localized. Thus, intrinsic bipolar cholinergic neurons can modulate cortical function locally.