Impaired emotional functioning in schizophrenia is a prominent clinical feature that manifests primarily as flat affect. Studies have examined the perception, experience, and expression of emotions in schizophrenia and reported normal ratings of experience but impaired affect identification. However, the relation between flat affect and performance on facial affect identification and cognitive tasks has not been systematically examined in relation to premorbid adjustment and clinical outcome. We report a prospective study of 63 patients with at least moderate severity of flat affect and 99 patients without flat affect, who were compared on functional domains, emotion processing tasks, and neurocognitive measures. Flat affect was more common in men and was associated with poorer premorbid adjustment, worse current quality of life, and worse outcome at 1-year follow-up. Patients overall performed more poorly on emotion processing tasks, one that required identification of happy and sad emotions and one that required differentiating among intensities within these emotions. They responded inaccurately yet faster than controls for the intensity differentiation task, suggesting a decomposition of the normal relation between accuracy and speed. Flat affect ratings, compared with other negative symptoms, uniquely predicted performance on emotion processing tasks. Patients with flat affect showed greater impairment in both emotion processing tasks, with the most pronounced impairment for the intensity differentiation task. However, the 2 patient groups did not differ in the neurocognitive profile except for verbal memory. We conclude that flat affect is an important clinical feature of schizophrenia that exacerbates the course of illness.