BACKGROUND Schizophrenia involves alterations in hippocampal function. The implications of these alterations for memory function in the illness remain poorly understood. Furthermore, it remains unknown how memory is impacted by drug treatments for schizophrenia. The goal of this study was to delineate specific memory processes that are disrupted in schizophrenia and explore how they are affected by medication. We specifically focus on memory generalization--the ability to flexibly generalize memories in novel situations. METHODS Individuals with schizophrenia (n = 56) and healthy control subjects (n = 20) were tested on a computerized memory generalization paradigm. Participants first engaged in trial-by-error associative learning. They were then asked to generalize what they learned by responding to novel stimulus combinations. Individuals with schizophrenia were tested on or off antipsychotic medication, using a between-subject design in order to eliminate concerns about learning-set effects. RESULTS Individuals with schizophrenia were selectively impaired in their ability to generalize knowledge, despite having intact learning and memory accuracy. This impairment was found only in individuals tested off medication. Individuals tested on medication generalized almost as well as healthy control subjects. This between-group difference was selective to memory generalization. CONCLUSIONS These findings suggest that individuals with schizophrenia have a selective alteration in the ability to flexibly generalize past experience toward novel learning environments. This alteration is unaccompanied by global memory impairments. Additionally, the results indicate a robust generalization difference on the basis of medication status. These results suggest that hippocampal abnormalities in schizophrenia might be alleviated with antipsychotic medication, with important implications for understanding adaptive memory-guided behavior.