Background: Understanding the biological basis of complex, heritable illnesses such as schizophrenia is facilitated by sensitive and functionally specific measures of intermediate processes. Context processing is a theoretically motivated construct associated with executive function. Impairments in this process have been associated with dysfunction of the prefrontal cortex. In the present study, we evaluated whether a specific deficit in context processing could be associated with the unexpressed genetic liability to schizophrenia. Methods: Twenty-four patients with schizophrenia, 24 unaffected siblings and 36 control subjects completed a version of the AX task with (1) a condition that required context processing and (2) an expectancy condition in which intact context processing could lead to errors. Results: Patients and unaffected siblings performed relatively worse in the context processing condition, whereas controls performed relatively worse in the expectancy condition. A double dissociation between siblings and controls (F=9.5, P<.005) constituted strong evidence of a specific deficit in context processing associated with a familial or genetic liability to schizophrenia. Preliminary evidence of high diagnostic efficiency was also noted (specificity, 38%; and sensitivity, 100%). Conclusions: Context processing deficits have been associated with dorsolateral prefrontal cortex dysfunctions in schizophrenia. Such a dysfunction may occur even when genetic liability to schizophrenia is unexpressed clinically. The present method of demonstrating a double dissociation may be a useful approach to exploring endophenotypes related to specific cognitive and neural processes that can be measured in ways sensitive to subtle group differences.