Schizophrenia is a complex disorder that encompasses several clinical symptom domains and functional impairments. Existing treatments are meager, effective only against positive symptoms without benefiting negative symptoms and functional impairments. The drug discovery process has focused mostly on targeting D2 dopamine receptors. This followed the serendipitous discovery of the antipsychotic effects of chlorpromazine in the 1950s and, more recently, clozapine. There is a need to identify novel mechanisms in order to discover novel drugs that are effective against each of the symptom clusters and functional impairments associated with the illness. Neurophysiological studies in schizophrenia over the past 3 decades have identified several brain deficits that are stable, using valid animal models that are related to the etiology of the disorder. Many of these deficits are distinct and heritable; these are called endophenotypes. Many have well-characterized neurobiology and may therefore provide molecular targets for drug development. In addition, these endophenotypes help reduce the heterogeneity by identifying homogeneous subgroups of patients with similar pathophysiology, symptoms and functional deficits. Clinical trials of drugs, whose development is based on an endophenotype, will have enhanced statistical power when the trial is carried out in an appropriate cohort of subjects using outcome measures related to the corresponding endophenotype. Furthermore, genes that are associated with these endophenotypes are beginning to be identified. These findings will identify novel molecular targets for drug development with treatment implications for clinical symptom complex and functional deficits marked by the endophenotype. As endophenotypes are present during childhood and adolescence, novel drugs that are developed on the basis of this subgroup could have implications for preventive strategies in schizophrenia.