Grafts of fetal septal tissue rich in cholinergic neurons were implanted as a dissociated cell suspension into the depth of the hippocampal formation in aged rats with severe impairments in spatial learning abilities. After 2 1/2 to 3 months, the rats with grafts, but not the controls, had improved their performance in a spatial learning test. Their improvement was due, at least in part, to an increased ability to use spatial cues in the task. In all animals the grafts had produced an extensive acetylcholinesterase-positive terminal network in the surrounding host hippocampal formation. Thus, the action of cholinergic neurons in the graft onto elements in the host hippocampal circuitry may be a necessary, but perhaps not sufficient, prerequisite for the observed functional recovery.