Behavioral evidence indicates that working memory (WM) in schizophrenia is already impaired at the encoding stage. However, the neurophysiological basis of this primary deficit remains poorly understood. Using event-related fMRI, we assessed differences in brain activation and functional connectivity during the encoding, maintenance and retrieval stages of a visual WM task with 3 levels of memory load in 17 adolescents with early-onset schizophrenia (EOS) and 17 matched controls. The amount of information patients could store in WM was reduced at all memory load levels. During encoding, activation in left ventrolateral prefrontal cortex (VLPFC) and extrastriate visual cortex, which in controls positively correlated with the amount of stored information, was reduced in patients. Additionally, patients showed disturbed functional connectivity between prefrontal and visual areas. During retrieval, right inferior VLPFC hyperactivation was correlated with hypoactivation of left VLPFC in patients during encoding. Visual WM encoding is disturbed by a failure to adequately engage a visual-prefrontal network critical for the transfer of perceptual information into WM. Prefrontal hyperactivation appears to be a secondary consequence of this primary deficit. Isolating the component processes of WM can lead to more specific neurophysiological markers for translational efforts seeking to improve the treatment of cognitive dysfunction in schizophrenia.