The functional optimization of neural ensembles is central to human higher cognitive functions. When the functions through which neural activity is tuned fail to develop or break down, symptoms and cognitive impairments arise. This review considers ways in which disturbances in the balance of excitation and inhibition might develop and be expressed in cortical networks in association with schizophrenia. This presentation is framed within a developmental perspective that begins with disturbances in glutamate synaptic development in utero. It considers developmental correlates and consequences, including compensatory mechanisms that increase intrinsic excitability or reduce inhibitory tone. It also considers the possibility that these homeostatic increases in excitability have potential negative functional and structural consequences. These negative functional consequences of disinhibition may include reduced working memory-related cortical activity associated with the downslope of the "inverted-U" input-output curve, impaired spatial tuning of neural activity and impaired sparse coding of information, and deficits in the temporal tuning of neural activity and its implication for neural codes. The review concludes by considering the functional significance of noisy activity for neural network function. The presentation draws on computational neuroscience and pharmacologic and genetic studies in animals and humans, particularly those involving N-methyl-D-aspartate glutamate receptor antagonists, to illustrate principles of network regulation that give rise to features of neural dysfunction associated with schizophrenia. While this presentation focuses on schizophrenia, the general principles outlined in the review may have broad implications for considering disturbances in the regulation of neural ensembles in psychiatric disorders.