We present a new model for the generation of theta rhythm of the hippocampus. We propose that theta at CA1 involves extracellular current fluxes produced by alternating depolarizing and hyperpolarizing membrane potential fluctuations of large populations of hippocampal pyramidal cells. Pyramidal cells are, in turn, controlled by rhythmically bursting cholinergic and GABAergic cells of the medial septum/vertical limb of the diagonal band. We postulate that septal cholinergic and GABAergic rhythmically bursting cells fire in relative synchrony; their coordinated burst discharge (burst mode) drives the positive-going phase of intracellular theta and associated firing of pyramidal cells; their synchronized pauses (interburst mode) give rise to the negative-going phase of intracellular theta and an inhibition of pyramidal cells. We further demonstrate that the theta rhythm is controlled by a network of cells extending from the brainstem to the septum/hippocampus. During theta, tonically discharging cells of the nucleus reticularis pontis oralis activate neurons of the supramammillary nucleus; the supramammillary nucleus, in turn, converts this steady barrage into a rhythmical pattern of discharge which is relayed to GABAergic/ cholinergic rhythmically bursting cells of the medial septum. The septal rhythmically bursting cells modulate subsets of hippocampal interneurons and principal cells in the generation of the theta rhythm. We review evidence showing that the serotonin-containing neurons of the median raphe nucleus desynchronize the hippocampal electroencephalogram, presumably by disrupting the rhythmical discharge of septal cholinergic and GABAergic neurons. Finally, we summarize recent work indicating that the theta rhythm is critically involved in memory functions of the hippocampus and that its disruption (electroencephalographic desynchronization) may block or temporarily suspend mnemonic processes of the hippocampus.