Deficits in processing contextual information are one of the main features of cognitive dysfunction in schizophrenia, but the neurophysiologic substrate underlying this dysfunction is poorly understood. We used ERPs to investigate local contextual processing in schizophrenic patients. Local context was defined as the occurrence of a short predictive series of stimuli occurring before delivery of a target event. Response times of predicted targets were faster in controls compared to patients. Schizophrenia patients failed to generate the P3b latency shift between predicted and random targets that was observed in controls and demonstrated a prominent reduction of the peak of an early latency context dependent positivity. The current study provides evidence of contextual processing deficits in schizophrenia patients by demonstrating alteration in the behavioral and neural correlates of local contextual processing.