Event-related potentials are a powerful tool to investigate the real-time course of brain electrical mass activation during cognitive processing. In several psychiatric disorders, differences compared to healthy subjects have been reliably described. The specificity and the pathophysiological meaning of the findings were unclear in most studies, however. This review summarizes methodological aspects and findings, in healthy subjects and psychiatric patients, of investigations based on the auditory oddball paradigm, which evokes the P300 component of event-related potentials. Recent convergent results from P300 and brain imaging studies allowed the interpretation of P300 findings in psychotic disorders in terms of different specific and meaningful neurophysiological disturbances. Namely, core schizophrenia is characterized by a left-temporal dysfunction associated with deficits in verbal processing. Acute remitting schizophrenia-like psychoses (cycloid psychosis, ICD-10 F23), on the other hand, show normal hemispheric balance but consistent signs of cerebral hyperarousal. Recent studies further indicate that the drive for action of manic patients does not rely on over-excitation but rather on frontal disinhibition. The findings may help to further advance the understandings and sub-grouping of functional psychoses based on pathophysiological mechanisms.