Octopus, squid and cuttlefish are renowned for rapid adaptive coloration that is used for a wide range of communication and camouflage. Structural coloration plays a key role in augmenting the skin patterning that is produced largely by neurally controlled pigmented chromatophore organs. While most iridescence and white scattering is produced by passive reflectance or diffusion, some iridophores in squid are actively controlled via a unique cholinergic, non-synaptic neural system. We review the recent anatomical and experimental evidence regarding the mechanisms of reflection and diffusion of light by the different cell types (iridophores and leucophores) of various cephalopod species. The structures that are responsible for the optical effects of some iridophores and leucophores have recently been shown to be proteins. Optical interactions with the overlying pigmented chromatophores are complex, and the recent measurements are presented and synthesized. Polarized light reflected from iridophores can be passed through the chromatophores, thus enabling the use of a discrete communication channel, because cephalopods are especially sensitive to polarized light. We illustrate how structural coloration contributes to the overall appearance of the cephalopods during intra- and interspecific behavioural interactions including camouflage.