The molecular and neuronal substrates conferring on clozapine its unique and superior efficacy in the treatment of schizophrenia remain elusive. The interaction of clozapine with many G protein-coupled receptors is well documented but less is known about its biologically active metabolite, N-desmethylclozapine. Recent clinical and preclinical evidences of the antipsychotic activity of the muscarinic agonist xanomeline prompted us to investigate the effects of N-desmethylclozapine on cloned human M1-M5 muscarinic receptors. N-desmethylclozapine preferentially bound to M1 muscarinic receptors with an IC50 of 55 nM and was a more potent partial agonist (EC50, 115 nM and 50% of acetylcholine response) at this receptor than clozapine. Furthermore, pharmacological and site-directed mutagenesis studies suggested that N-desmethylclozapine preferentially activated M1 receptors by interacting with a site that does not fully overlap with the acetylcholine orthosteric site. As hypofunction of N-methyl-d-aspartate (NMDA) receptor-driven neuronal ensembles has been implicated in psychotic disorders, the neuronal activity of N-desmethylclozapine was electrophysiologically investigated in hippocampal rat brain slices. N-desmethylclozapine was shown to dose-dependently potentiate NMDA receptor currents in CA1 pyramidal cells by 53% at 100 nM, an effect largely mediated by activation of muscarinic receptors. Altogether, our observations provide direct evidence that the brain penetrant metabolite N-desmethylclozapine is a potent, allosteric agonist at human M1 receptors and is able to potentiate hippocampal NMDA receptor currents through M1 receptor activation. These observations raise the possibility that N-desmethylclozapine contributes to clozapine's clinical activity in schizophrenics through modulation of both muscarinic and glutamatergic neurotransmission.