Contrast encoding for sinusoidal modulations of luminance contrast was investigated by intracellular recording in the intact salamander retina. In what appears to be the first study of this kind for vertebrate bipolar cells, responses of the central receptive-field mechanism of cone-driven cells to modulation of 3 Hz were analyzed quantitatively via both signal averaging and a Fast Fourier Transform (FFT) while the retina was light adapted to 20 cd/m2. Depolarizing and hyperpolarizing bipolar cells showed very similar encoding. Both responded with sinusoidal waveforms whose amplitude varied linearly with modulation depths ranging up to 7-8%. The slope of the modulation/response curve was very steep in this range. Thus, the contrast gain was high, reaching values of 6-7, and the half-maximal response was achieved at modulations of 9% or less. At modulations above approximately 15%, the responses typically showed strong compressive nonlinearity and the waveform was increasingly distorted. At maximum modulation, the higher harmonics of the FFT constituted about 30% of the amplitude of the fundamental. Measurements were also made for cones and horizontal cells. Both cell types showed predominantly linear responses and low contrast gain, in marked contrast to bipolar cells. These results suggest that the high contrast gain and strong nonlinearity of bipolar cells largely arise postsynaptic to cone transmitter release. Further experiments were performed to compare responses to contrast steps versus those to sinusoidal modulation. In the linear range, we show that the contrast gains of cones and horizontal cells are low and virtually identical for both steps and sinusoidal modulations. In bipolar cells, on the other hand, the contrast gain is about two times greater for steps than that for the 3-Hz sine waves. These results suggest that mechanisms intrinsic to bipolar cells act like a high-pass filter with a short time constant to selectively emphasize contrast transients over slower changes in contrast.