Visual processing deficits are an integral component of schizophrenia and are sensitive predictors of schizophrenic decompensation in healthy adults. The primate visual system consists of discrete subcortical magnocellular and parvocellular pathways, which project preferentially to dorsal and ventral cortical streams. Subcortical systems show differential stimulus sensitivity, while cortical systems, in turn, can be differentiated using surface potential analysis. The present study examined contributions of subcortical dysfunction to cortical processing deficits using high-density event-related potentials. Event-related potentials were recorded to stimuli biased towards the magnocellular system using low-contrast isolated checks in Experiment 1 and towards the magnocellular or parvocellular system using low versus high spatial frequency (HSF) sinusoidal gratings, respectively, in Experiment 2. The sample consisted of 23 patients with schizophrenia or schizoaffective disorder and 19 non-psychiatric volunteers of similar age. In Experiment 1, a large decrease in the P1 component of the visual event-related potential in response to magnocellular-biased isolated check stimuli was seen in patients compared with controls (F = 13.2, P = 0.001). Patients also showed decreased slope of the contrast response function over the magnocellular-selective contrast range compared with controls (t = 9.2, P = 0.04) indicating decreased signal amplification. In Experiment 2, C1 (F = 8.5, P = 0.007), P1 (F = 33.1, P < 0.001) and N1 (F = 60.8, P < 0.001) were reduced in amplitude to magnocellular-biased low spatial frequency (LSF) stimuli in patients with schizophrenia, but were intact to parvocellular-biased HSF stimuli, regardless of generator location. Source waveforms derived from inverse dipole modelling showed reduced P1 in Experiment 1 and reduced C1, P1 and N1 to LSF stimuli in Experiment 2, consistent with surface waveforms. These results indicate pervasive magnocellular dysfunction at the subcortical level that leads to secondary impairment in activation of cortical visual structures within dorsal and ventral stream visual pathways. Our finding of early visual dysfunction is consistent with and explanatory of classic literature showing subjective complaints of visual distortions and is consistent with early visual processing deficits reported in schizophrenia. Although deficits in visual processing have frequently been construed as resulting from failures of top-down processing, the present findings argue strongly for bottom-up rather than top-down dysfunction at least within the early visual pathway. Deficits in magnocellular processing in this task may reflect more general impairments in neuronal systems functioning, such as deficits in non-linear amplification and may thus represent an organizing principle for predicting neurocognitive dysfunction in schizophrenia.