Patients with and at risk for psychosis may have difficulty using associative strategies to facilitate episodic memory encoding and recall. In parallel studies, patients with first-episode schizophrenia (n = 27) and high psychosis risk (n = 28) compared with control participants (n = 22 and n = 20, respectively) underwent functional MRI during a remember-know memory task. Psychophysiological interaction analyses, using medial temporal lobe (MTL) structures as regions of interest, were conducted to measure functional connectivity patterns supporting successful episodic memory. During encoding, patients with first-episode schizophrenia demonstrated reduced functional coupling between MTL regions and regions involved in stimulus representations, stimulus selection, and cognitive control. Relative to control participants and patients with high psychosis risk who did not convert to psychosis, patients with high psychosis risk who later converted to psychosis also demonstrated reduced connectivity between MTL regions and auditory-verbal and visual-association regions. These results suggest that episodic memory deficits in schizophrenia are related to inefficient recruitment of cortical connections involved in associative memory formation; such deficits precede the onset of psychosis among those individuals at high clinical risk.