Increased attention to the prevalence of excessive sleepiness has led to a clear need to treat this symptom, thus reinforcing the need for a greater understanding of the neurobiology of sleep and wakefulness. Although the physiological mechanisms of sleep and wakefulness are highly interrelated, recent research reveals that there are distinct differences in the active brain processing and the specific neurochemical systems involved in the two states. In this review, we will examine the specific neuronal pathways, transmitters, and receptors composing the ascending arousal system that flow from the brainstem through the thalamus, hypothalamus, and basal forebrain to the cerebral cortex. We will also discuss the mutually inhibitory interaction between the core neuronal components of this arousal system and the sleep-active neurons in the ventrolateral preoptic nucleus, which serves as a brainstem-switch, regulating the stability of the sleep-wake states. In addition, we will review the role of homeostatic and circadian processes in the sleep-wake cycle, including the influence of the suprachiasmatic nucleus on coordination of sleep-wake systems. Finally, we will summarize how the above processes are reflected in disorders of sleep and wakefulness, including insomnia, narcolepsy, disorders associated with fragmented sleep, circadian rhythm sleep disorders, and primary neurological disorders such as Parkinsons and Alzheimers diseases.