Hippocampal theta (4-10 Hz) oscillation represents a well-known brain rhythm implicated in spatial cognition and memory processes. Its cellular mechanisms remain a matter of debate, and previous computational work has focused mostly on mechanisms intrinsic to the hippocampus. On the other hand, experimental data indicate that GABAergic cells in the medial septum play a pacemaker role for the theta rhythm. We have used biophysical modeling to address two major questions raised by the septal pacemaker hypothesis: what is the ion channel mechanism for the single-cell pacemaker behavior and how do these cells become synchronized? Our model predicts that theta oscillations of septal GABAergic cells depend critically on a low-threshold, slowly inactivating potassium current. Network simulations show that theta oscillations are not coherent in an isolated population of pacemaker cells. Robust synchronization emerges with the addition of a second GABAergic cell population. Such a reciprocally inhibitory circuit can be realized by the hippocampo-septal feedback loop.