A summary of brain theory is given so far as it is contained within the framework of Localization Theory. Diffculties of this "conventional theory" are traced back to a specific deficiency: there is no way to express relations between active cells (as for instance their representing parts of the same object). A new theory is proposed to cure this deficiency. It introduces a new kind of dynamical control, termed synaptic modulation, according to which synapses switch between a conducting and a non- conducting state. The dynamics of this variable is controlled on a fast time scale by correlations in the temporal fine structure of cellular signals. Furthermore, conventional synaptic plasticity is replaced by a refined version. Synaptic modulation and plasticity form the basis for short-term and long-term memory, respectively. Signal correlations, shaped by the variable network, express structure and relationships within objects. In particular, the figure-ground problem may be solved in this way. Synaptic modulation introduces flexibility into cerebral networks which is necessary to solve the invariance problem. Since momentarily useless connections are deactivated, interference between different memory traces can be reduced, and memory capacity increased, in comparison with conventional associative memory.