Nicotine temporarily normalizes smooth pursuit eye movement deficits in schizophrenia. This study used functional magnetic resonance imaging (fMRI) to examine changes in brain hemodynamic response associated with nicotine administration during a smooth pursuit eye movement task in subjects with schizophrenia. Nine subjects with schizophrenia performed the eye movement task while undergoing fMRI. Subjects then were given nicotine or placebo and repeated the task while being scanned. Subjects repeated the procedure the following week, receiving the counterbalanced condition. Compared with placebo, nicotine was associated with greater activity in the anterior and posterior cingulate gyri, precuneus, and area MT/MST and less activity in the hippocampus and parietal eye fields. Changes in area MT/MST and the cingulate gyrus are consistent with an improvement in perception and attention to moving stimuli. The most important observed difference between nicotine and placebo--less activation of the hippocampus after nicotine than after placebo administration--is consistent with nicotinic receptor mediation of inhibitory neuronal dysfunction in schizophrenia.