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RECENT PET imaging and brain lesion studies in humans are integrated with new basic research findings at the cellular level in animals to explain how the formal cognitive features of dreaming may be the combined product of a shift in neuromodulatory balance of the brain and a related redistribution of regional blood flow. The human PET data indicate a preferential activation in REM of the pontine brain stem and of limbic and paralimbic cortical structures involved in mediating emotion and a corresponding deactivation of dorsolateral prefrontal cortical structures involved in the executive and mnemonic aspects of cognition. The pontine brainstem mechanisms controlling the neuromodulatory balance of the brain in rats and cats include noradrenergic and serotonergic influences which enhance waking and impede REM via anticholinergic mechanisms and cholinergic mechanisms which are essential to REM sleep and only come into full play when the serotonergic and noradrenergic systems are inhibited. In REM, the brain thus becomes activated but processes its internally generated data in a manner quite different from that of waking.