It has been reported that reality evaluation and recognition are impaired in patients with schizophrenia and these impairments are related to the severity of psychotic symptoms. The current study aimed to investigate the neural basis of impairments in reality evaluation and recognition and their relationships with cognitive insight in schizophrenia. During functional magnetic resonance imaging, 20 patients with schizophrenia and 20 healthy controls performed a set of reality evaluation and recognition tasks, in which subjects judged whether scenes in a series of drawings were real or unreal and whether they were familiar or novel. During reality evaluation, patients showed decreased activity in various regions including the inferior parietal lobule, retrosplenial cortex and parahippocampal gyrus, compared with controls. Particularly, parahippocampal gyrus activity was correlated with the severity of positive symptoms in patients. During recognition, patients also exhibited decreased activity in various regions, including the dorsolateral prefrontal cortex, inferior parietal lobule and posterior cingulate cortex. Particularly, inferior parietal lobule activity and posterior cingulate cortex activity were correlated with cognitive insight in patients. These findings provide evidence that neural impairments in reality evaluation and recognition are related to psychotic symptoms. Anomalous appraisal of context by dysfunctions in the context network may contribute to impairments in the reality processing in schizophrenia, and abnormal declarative memory processes may be involved in cognitive insight in patients with schizophrenia.