Solid pieces of embryonic hippocampal tissue were implanted in a cavity formed by aspiration of the fimbria-fornix and the overlying cingulate cortex in adult rats. Six to 8 months after the transplantation, chronic recording electrodes were implanted into the graft and the host hippocampi for the recording of electroencephalogram and unit activity in the freely moving animal. Irregularly occurring sharp waves or electroencephalogram spikes and concurrent synchronous discharge of large groups of neurons dominated the electrical activity of the grafts, in contrast to the situation in normal animals. Light microscopy and GABA immunocytochemistry in the grafts revealed that the three major cell types of the hippocampal formation, i.e. pyramidal neurons, dentate granule cells and GABA-immunoreactive interneurons were present in the hippocampal grafts. At the ultrastructural level, however, significant alterations in connectivity were observed. The most striking finding was the absence or sparse occurrence of synapses on the axon initial segments of pyramidal neurons. The axon initial segments are normally densely covered by GABAergic synapses derived from a specialized type of interneuron, the chandelier or axo-axonic cell. On the other hand, numerous GABA-immunoreactive terminals were found in synaptic contact with somata of pyramidal neurons, suggesting that other types of GABAergic interneurons and their efferent connections may have developed in a normal manner. The cell bodies of pyramidal neurons received, in addition, several asymmetric synapses from GABA-negative terminals. These presumably excitatory synapses are not present on the somata of pyramidal cells in the normally developing hippocampus. We hypothesize that the somatic excitatory synapses originate, at least in part, from the axon collaterals of the neighbouring pyramidal cells in the graft. We suggest that the hyperexcitability of the neuronal circuitry within the graft is due to reduced inhibition (lack of axo-axonic synapses) coupled with increased collateral excitation of the pyramidal neurons.