Hypocretins (Hcrts), or orexins, are a recently described set of hypothalamic peptides that have been implicated in feeding, neuroendocrine regulation, sleep-wakefulness, and disorders of sleep, such as narcolepsy. Hcrt-containing neurons, which are located exclusively in the lateral hypothalamic area, provide a dense innervation to the medial septum/diagonal band of Broca (MSDB), a sleep-associated brain region that has been suggested to show intense axonal degeneration in canine narcoleptics. The MSDB, via its cholinergic and GABAergic projections to the hippocampus, controls the hippocampal theta rhythm and associated learning and memory functions that occur during exploratory behavior and rapid eye movement sleep. Neurons of the MSDB express the Hcrt receptor 2, which is mutated in canine narcoleptics, but lack the Hcrt receptor 1 mRNA. In the present study, we investigated the electrophysiological effects of Hcrt2 on MSDB neurons from rat brain slices. We report that Hcrt2 produces a reversible, reproducible, concentration-dependent and direct postsynaptic excitation of GABA-type neurons of the MSDB with an EC50 of 207 nm. This effect is sodium dependent but not potassium or chloride dependent and is attenuated by blockers of the Na+-Ca+ exchanger. Hcrt2 also increases impulse-dependent release of GABA within the MSDB. Using recordings from retrogradely labeled septohippocampal neurons, we found that Hcrt2-excited MSDB neurons project to the hippocampus and have a GABAergic physiological signature. Double-immunolabeling studies confirmed the presence of Hcrt receptor-2 immunoreactivity in septohippocampal GABAergic neurons, as well as the presence of Hcrt fibers adjacent to these neurons. Based on these results, we speculate that Hcrt2-induced activation of septohippocampal GABAergic neurons will, by engaging disinhibitory mechanisms in the hippocampus, promote generation of the hippocampal theta rhythm and associated behaviors.