Background White matter microstructural disruptions have been observed in patients with schizophrenia. However, whether changes exist prior to disease onset or in high-risk individuals is unclear. Here, we investigated white matter integrity, as assessed by diffusion tensor imaging (DTI), in individuals at ultra-high risk for psychosis (UHR) relative to healthy control subjects (HC) and the relationship between baseline DTI measures and functional outcome over time. Methods Thirty-six UHR participants and 25 HCs completed baseline DTI scans. Subjects also completed clinical follow-up assessments approximately 6 months (26 subjects) and 15 months (13 subjects) later. We used a rigorous registration approach (Tract-Based Spatial Statistics [TBSS]) to examine fractional anisotropy (FA) in six major white matter tracts. Results Relative to the HC group, UHR subjects showed lower baseline FA in the superior longitudinal fasciculus, the major frontoparietal white matter connection. Cross-sectional analyses demonstrated that UHR youth failed to show the same age-associated increases in FA in the medial temporal lobe (MTL) and inferior longitudinal fasciculus as HCs. Finally, lower baseline FA in the MTL and inferior longitudinal fasciculus predicted deterioration in social and role functioning in UHR participants at 15-month follow-up. Conclusions This is the first investigation of white matter microstructural alterations in a clinical high-risk sample. Our findings indicate that white matter development may be altered in youth at risk for psychosis, possibly due to disrupted developmental mechanisms, and further, that white matter integrity may be predictive of functional outcome.