Current treatments of Alzheimer's disease include the allosteric potentiation of nicotinic acetylcholine receptor (nAChR) response. The location of the binding site for allosteric potentiating ligands (APLs) within the receptor is not yet fully understood. Based on homology models for the ligand binding domain of human alpha7, human alpha4beta2, and chicken alpha7 receptors, as well as blind docking experiments with galanthamine, physostigmine, codeine, and 5HT, we identified T197 as an essential element of the APL binding site at the outer surface of the ligand binding domain (LBD) of nAChR. We also found the previously known galanthamine binding site in the region of K123 at the inside of the receptor funnel, which, however, was shown to not be part of the APL site. Our results are verified by site-directed mutagenesis and electrophysiological experiments, and suggest that APL and ACh bind to different sites on nicotinic receptors and that allosteric potentiation may arise from a direct interplay between both these sites.