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Objective: Prefrontal dysfunction is considered a fundamental characteristic of schizophrenia. Recent electrophysiological evidence points to a major instability of signal processing in prefrontal cortical microcircuits because of reduced phase-synchronization (i.e., an increased stimulus-related variability [noise] of single-trial responses in the spatial and time domain). The authors used functional magnetic resonance imaging (fMRI) during a visual two-choice reaction task in order to measure, with higher topographic accuracy, signal stability in patients with schizophrenia and its relationship to more traditional measures of activation. Method: Twelve clinically stable inpatients with schizophrenia and 16 matched comparison subjects were evaluated. Event-related blood-oxygen-level-dependent responses were subjected to an analysis of residual noise variance and to independent data dimension independent component analysis in the medial prefrontal cortex. Results: In patients with schizophrenia, the authors found increased residual noise variance of the blood-oxygen-level-dependent response that predicted the level of prefrontal activation in these subjects. In the left hemisphere, residual noise variance strongly correlated with psychotic symptoms. Independent component analysis revealed a “fractionized” and unfocussed pattern of activation in patients. Conclusions: These findings suggest that unstable cortical signal processing underlies classic abnormal cortical activation patterns as well as psychosis in schizophrenia.