The search for liability genes of the world's 2 major psychotic disorders, schizophrenia and bipolar disorder I (BP-I), has been extremely difficult even though evidence suggests that both are highly heritable. This difficulty is due to the complex and multifactorial nature of these disorders. They encompass several intermediate phenotypes, some overlapping across the 2 psychotic disorders that jointly and/or interactively produce the clinical manifestations. Research of the past few decades has identified several neurophysiological deficits in schizophrenia that frequently occur before the onset of psychosis. These include abnormalities in smooth pursuit eye movements, P50 sensory gating, prepulse inhibition, P300, mismatch negativity, and neural synchrony. Evidence suggests that many of these physiological deficits are distinct from each other. They are stable, mostly independent of symptom state and medications (with some exceptions) and are also observed in non-ill relatives. This suggests a familial and perhaps genetic nature. Some deficits are also observed in the BP-I probands and to a lesser extent their relatives. These deficits in physiological measures may represent the intermediate phenotypes that index small effects of genes (and/or environmental factors). The use of these measures in genetic studies may help the hunt for psychosis liability genes and clarify the extent to which the 2 major psychotic disorders share etio-pathophysiology. In spite of the rich body of work describing these neurophysiological measures in psychotic disorders, challenges remain: Many of the neurophysiological phenotypes are still relatively complex and are associated with low heritability estimates. Further refinement of these physiological phenotypes is needed that could identify specific underlying physiological deficits and thereby improve their heritability estimates. The extent to which these neurophysiological deficits are unique or overlap across BP-I and schizophrenia is unclear. And finally, the clinical and functional consequences of the neurophysiological deficits both in the probands and their relatives are not well described.