Schizophrenia is a common mental illness with a high prevalence of smoking. More than 80% of schizophrenics smoke compared to 25% of the general population. Both schizophrenia and tobacco use have strong genetic components, which may overlap. It has been suggested that smoking in schizophrenia may be a form of self-medication in an attempt to treat an underlying biological pathology. Smoking normalizes auditory evoked potential and eye tracking deficits in schizophrenia, as well as improving cognitive function. Nicotine acts through a family of nicotinic receptors with either high or low affinity for nicotine. The loci for several of these receptors have been genetically linked to both smoking and to schizophrenia. Smoking changes gene expression for more than 200 genes in human hippocampus, and differentially normalizes aberrant gene expression in schizophrenia. The α7* nicotinic receptor, linked to schizophrenia and smoking, has been implicated in sensory processing deficits and is important for cognition and protection from neurotoxicity. Nicotine, however, has multiple health risks and desensitizes the receptor. A Phase I trial of DMXB-A, an α7* agonist, shows improvement in both P50 gating and in cognition, suggesting that further development of nicotinic cholinergic drugs is a promising direction in schizophrenia research.