Those pharmaceutical companies whose goal is to generate novel innovative drugs are faced with the challenge that only a fraction of the compounds tested in clinical trials eventually become a registered drug. This problem of attrition is compounded by the fact that the clinical trial or development stage is by far the most costly phase of bringing a new drug to market, consuming around 80 per cent of the total spend. Transgenic technology represents an attractive approach to reducing the attrition rate of compounds entering clinical trials by increasing the quality of the target and compound combinations making the transition from discovery into development. Transgenic technology can impact at many points in the discovery process, including target identification and target validation, and provides models designed to alert researchers early to potential problems with drug metabolism and toxicity, as well as providing better models for human diseases. In target identification, transgenic animals harbouring large DNA fragments can be used to narrow down genetic regions. Genetic studies often result in the identification of large genomic regions and one way to decrease the region size is to do complementation studies in transgenic animals using, for example, inserts from bacterial artificial chromosome (BAC) clones. In target validation, transgenic animals can be used for in vivo validation of a specific target. Considerable efforts are being made to establish new, rapid and robust tools with general utility for in vivo validation, but, so far, only transgenic animals work reliably on a wide range of targets. Transgenic animals can also be used to generate better disease models. Predictive animal models to test new compounds and targets will significantly speed up the drug discovery process and, more importantly, increase the quality of the compounds taken further in the research and development process. Humanised transgenic animals harbouring the human target molecule can be used to understand the effect of a compound acting on the human target in vivo. Also, models mimicking human drug metabolism will provide a means of assessing the effect of human-specific metabolites and of understanding the pharmacokinetic properties of potential drugs. In toxicology studies, transgenic animals are providing more predictive models. A good example of this are those models routinely used to look for carcinogenicity associated with new compounds.