There is a strong correlation between signature EEG frequency patterns and the relative levels of distinct neuromodulators. These associations become particularly evident during the sleep-wake cycle. The monoamine-acetylcholine balance hypothesis is a theory of neurophysiological markers of the EEG and a detailed description of the findings that support this proposal are presented in this paper. According to this model alpha rhythm reflects the relative predominance of cholinergic muscarinic signals and delta rhythm that of monoaminergic receptor effects. Both high voltage synchronized rhythms are likely mediated by inhibitory Gαi/o-mediated transduction of inhibitory interneurons. Cognitively, alpha and delta EEG measures are proposed to indicate automatic and flexible strategies, respectively. Sleep is associated with marked changes in relative neuromodulator levels corresponding to EEG markers of distinct stages. Sleep studies on memory consolidation present some of the strongest evidence yet for the respective roles of monoaminergic and cholinergic projections in declarative and non-declarative memory processes, a key theoretical premise for understanding the data. Affective dysregulation is reflected in altered EEG patterns during sleep.