Introduction: High-frequency oscillations are important for sensory processing and dysfunctions in the amplitude and synchrony of beta- and gamma-band oscillations have been demonstrated in schizophrenia (ScZ). However, the presence of aberrant high-frequency oscillations in first-episode (FE), medication-naive patients during sensory processing is unclear. Methods: Magnetoencephalographic (MEG) data were recorded from 15 never-medicated, FE-ScZ patients and 20 matched healthy controls during the perception of Mooney faces. MEG data were analysed for spectral power and single-sensor phase-locking in the beta (13–25 Hz) and gamma- (25–140 Hz) frequency range. Results: FE-ScZ patients were characterized by significantly impaired sensory processing as indicated by a reduced discrimination index (A′). Impaired behavioural performance in ScZ-patients was accompanied by decreased spectral power in the high- (60–120 Hz) gamma-band range. In contrast, oscillations in the lower (25–60 Hz) gamma-band were largely intact and beta-band oscillations were increased. Analysis of cross-frequency coupling showed a reduced correlation between 60 and 120 Hz amplitude values and beta-band power in FE-ScZ-patients relative to controls. Discussion: Our findings show that impaired sensory processing in medication-naive, FE-schizophrenia is related to a dysregulation of neural oscillations which involves both an impairment in the generation of high gamma-band activity as well as a failure to downregulate task-irrelevant beta-band activity. Because of the interrelationship of these dysfunctions and the role of inhibitory networks in the shaping of high-frequency activity, aberrant neural oscillations in FE-schizophrenia may be linked to dysfunctions in the excitation–inhibition (E/I)-balance.