Although α7 nicotinic acetylcholine receptors are considered potentially important therapeutic targets, the development of selective agonists has been stymied by the α7 receptor's intrinsically low probability of opening (P(open)) and the concern that an agonist-based therapeutic approach would disrupt endogenous cholinergic function. Development of α7 positive allosteric modulators (PAMs) holds promise of avoiding both issues. N-(5-Chloro-2,4-dimethoxyphenyl)-N'-(5-methyl-3-isoxazolyl)-urea (PNU-120596) is one of the most effective α7 PAMs, with a mechanism associated, at least in part, with the destabilization of desensitized states. We studied the mechanism of PNU-120596 potentiation of α7 receptors expressed in Xenopus laevis oocytes and outside-out patches from BOSC 23 cells. We identify two forms of α7 desensitization: one is destabilized by PNU-120596 (D(s)), and the other is induced by strong episodes of activation and is stable in the presence of the PAM (D(i)). Our characterization of prolonged bursts of single-channel currents that occur with PNU-120596 provide a remarkable contrast to the behavior of the channels in the absence of the PAM. Individual channels that avoid the D(i) state show a 100,000-fold increase in P(open) compared with receptors in the nonpotentiated state. In the presence of PNU-120596, balance between D(s) and D(i) is dynamically regulated by both agonist and PAM binding, with maximal ion channel activity at intermediate levels of binding to both classes of sites. In the presence of high agonist concentrations, competitive antagonists may have the effect of shifting the balance in favor of D(s) and increasing ion channel currents.