Schizophrenic patients suffer from many deficits including visual, attentional, and cognitive ones. Visual deficits are of particular interest because they are at the fore-end of information processing and can provide clear examples of interactions between sensory, perceptual, and higher cognitive functions. Visual deficits in schizophrenic patients are often attributed to impairments in the dorsal (where) rather than the ventral (what) stream of visual processing. We used a visual-masking paradigm in which patients and matched controls discriminated small vernier offsets. We analyzed the evoked electroencephalography (EEG) responses and applied distributed electrical source imaging techniques to estimate activity differences between conditions and groups throughout the brain. Compared with controls, patients showed strongly reduced discrimination accuracy, confirming previous work. The behavioral deficits corresponded to pronounced decreases in the evoked EEG response at around 200 ms after stimulus onset. At this latency, patients showed decreased activity for targets in left parietal cortex (dorsal stream), but the decrease was most pronounced in lateral occipital cortex (in the ventral stream). These deficiencies occurred at latencies that reflect object processing and fine shape discriminations. We relate the reduced ventral stream activity to deficient top-down processing of target stimuli and provide a framework for relating the commonly observed dorsal stream deficiencies with the currently observed ventral stream deficiencies.