Forebrain cholinergic neurons modulate complex mammalian behaviors such as reward-related learning and cognitive functions. Although their dysfunction is implicated in various psychiatric and neurodegenerative diseases, the factors governing cholinergic neuron differentiation and diversity are mostly unknown. We tested the role of the LIM-homeobox gene Isl1 in the development of forebrain cholinergic neurons by conditionally deleting Isl1 using a Six3-cre transgene. A depletion of cholinergic interneurons in the dorsal and ventral striatum, and cholinergic projection neurons in the nucleus basalis is observed and is ascribed to an early and persistent defect in cholinergic neuron differentiation. Notably, cholinergic innervation to the neocortex is abolished, whereas that to the hippocampus is unaltered. The unique pattern of cholinergic hypoinnervation encountered is supported by the presence of cholinergic projection neurons in the medial septum, the magnocellular preoptic area, and the substantia innominata. Together, these results demonstrate the requirement for Isl1 in the development of restricted telencephalic cholinergic neurons and link the development of cholinergic neurons in anatomically disparate sites to Isl1 function.