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Several studies have stressed the relevance of family environment in the course of schizophrenia and the perception of the pathology by both the subjects and family members. The objective of the current qualitative study consisted in the development of a grounded theory (GT) regarding narcissism and the family dynamics of subjects diagnosed with paranoid schizophrenia. Semi-structured interviews were conducted with five subjects in a state psychiatric hospital in the urban catchment area of Lisbon and their respective families. A diagnosis of paranoid schizophrenia had previously been established according to DSM-IV-TR and ICD-10 criteria. The interviews were transcribed and analyzed using the GT methodology, in order to identify the latent processes. A basic social process of narcissistic equilibrium was identified as a way to protect personal and familial identity, where three main processes were found: splitting, detachment and projective identification. These processes were developed as a tentative solution for the existing narcissistic impairments in the self and/or family, occurring both in an intrapsychic dimension and on a transactional dimension within family relationships.