The significance of cholinergic modulation for associative memory performance in the piriform cortex was examined in a study combining cellular neurophysiology in brain slices with realistic biophysical network simulations. Three different physiological effects of acetylcholine were identified at the single-cell level: suppression of neuronal adaptation, suppression of synaptic transmission in the intrinsic fibers layer, and activity-dependent increase in synaptic strength. Biophysical simulations show how these three effects are joined together to enhance learning and recall performance of the cortical network. Furthermore, our data suggest that activity-dependent synaptic decay during learning is a crucial factor in determining learning capability of the cortical network. Accordingly, it is predicted that acetylcholine should also enhance long-term depression in the piriform cortex.