Pregnenolone (P) and dehydroepiandrosterone (D) accumulate in the brain as unconjugated steroids and their sulfate (S) and fatty acid (L) esters. The microsomal acyl-transferase activity is highest in immature (1-3 weeks old) male rats. The immunocytochemical and biochemical evidence for P biosynthesis by differentiated oligodendrocytes is reviewed. The importance of P synthesis for its brain accumulation is assessed by the intracysternal injection of the inhibitor aminoglutethimide. Primary glial cell cultures convert P to 20-OH-P, PL, progesterone, 5 alpha-pregnane-3,20-dione and 3 alpha-hydroxy-5 alpha-pregnane-20-one (Polone). Astroglial cell cultures also produce these metabolites, whereas neurons from 17-day mouse embryos only form 20-OH-P. P and D are converted to the corresponding 7 alpha-hydroxylated metabolites by a very active P-450 enzyme from rat brain microsomes. Several functions of neurosteroids are documented. P decreases in olfactory bulb of intact male rats exposed to the scent of estrous females. D inhibits the aggressive behavior of castrated male mice towards lactating female intruders. The D analog 3 beta-methyl-androst-5-en-17-one, which cannot be metabolized into sex steroids and is not demonstrably androgenic or estrogenic is at least as efficient as D. Both compounds elicit a marked decrease of PS in rat brain. The Cl- conductance of gamma-aminobutyric (GABAA) receptor is stimulated by GABA agonists, an effect which is enhanced by Polone and antagonized by PS. Thus, P metabolites in brain as well as steroids of extraencephalic sources may be involved physiologically in GABAA receptor function. The neurosteroids accumulated in brain may be precursors of sex steroid hormones and progesterone receptors have been localized in glial cells. P and D do not bind to any known intracellular receptor. A heat stable P binding protein has been found in brain cytosol with distinct ligand specificity. A binding component specific for steroids sulfates, including Polone S, DS and PS, in the order of decreasing affinity is localized in adult rat brain synaptosomal membranes. Its relationship to the GABAA receptor is under current investigation.