Lesions of the septohippocampal pathway produce cognitive deficits that are partially attenuated by grafts of cholinergic-rich tissue into denervated target regions or by systemic administration of cholinomimetic drugs. In the present study, fibroblasts engineered to produce acetylcholine were used to test the hypothesis that restoration of hippocampal acetylcholine in rats with septohippocampal lesions is sufficient to improve cognitive processing post-damage. Rats received unilateral grafts of acetylcholine-producing or control fibroblasts into the hippocampus immediately prior to an aspirative lesion of the ipsilateral fimbria-fornix. Some rats with fimbria-fornix lesions were implanted with acetylcholine-producing or control fibroblasts into the neocortex, another major target of the basal forebrain cholinergic system, to determine if the site of acetylcholine delivery to the damaged brain is critical for functional recovery. Rats were tested in a hidden platform water maze task, a cued water maze task and activity chambers between one and three weeks post-grafting. Compared to unoperated controls, rats with fimbria fornix lesions only were significantly impaired in hidden platform water maze performance. Hippocampal grafts of acetylcholine-producing cells reduced lesion-induced deficits in the water maze, whereas hippocampal control grafts and cortical grafts of either cell type were without effect. Locomotor activity and cued water maze performance were unaffected by the lesion or the implants. Taken together, these data indicate that water maze deficits produced by fimbria fornix lesions, which disrupt a number of hippocampal neurotransmitter systems, can be attenuated by target specific replacement of acetylcholine in the hippocampus and that this recovery occurs in the absence of circuitry repair.