The axon initial segment (AIS) is a specialized membrane region in the axon of neurons where action potentials are initiated. Crucial to the function of the AIS is the presence of specific voltage-gated channels clustered at high densities, giving the AIS unique electrical properties. Here we review recent data on the physiology of the AIS. These data indicate that the role of the AIS is far richer than originally thought, leading to the idea that it represents a dynamic signal processing unit within neurons, regulating the integration of synaptic inputs, intrinsic excitability, and transmitter release. Furthermore, these observations point to a critical role of the AIS in disease.