Background Cognitive deficits are recognized as a critical determinant of functional outcomes in schizophrenia; and second generation antipsychotic drugs have been touted for their potential to enhance cognitive functioning and community tenure. Objectives The study examined the relative merits of olanzapine and quetiapine in improving cognitive deficits and enhancing psychosocial functioning in a sample of community dwelling adults previously treated with first generation antipsychotic drugs for schizophrenia. Methods In a prospective, rater-blinded study, 86 participants were randomized to receive either olanzapine or quetiapine, and assessed at baseline and after 3, 6, 9 and 12 months. Outcome measures included, besides symptoms and side effects rating scales, the subjective scale to investigate cognition in schizophrenia (SSTICS), a computer-assisted cognitive test battery (COGLAB), the sickness impact profile (SIP), the global assessment of functioning (GAF) scale, and the drug attitude inventory (DAI). Results Both olanzapine and quetiapine were equally effective in improving symptom severity and decreasing the neurological side effects. Quetiapine was significantly better tolerated (p =0.002), improved self-rated cognitive dysfunction (p =0.002) and subjects' performance on selected neurocognitive tasks (p =0.01). Olanzapine use was associated with greater symptom stability, fewer drop outs (p =0.01) and frequent metabolic aberrations (p =0.001). The accrued benefits of drug therapy, however, were not reflected as significant gains in daily functioning and quality of life. Conclusions Quetiapine is noted to have specific cognition enhancing properties in schizophrenia that warrants further exploration. The observed clinical and cognitive benefits associated with quetiapine may likely be attributable to its loose binding to, and fast dissociation from the dopamine receptors. Olanzapine has proved to be a reliable antipsychotic drug with a greater liability to cause metabolic abnormalities.