Schizophrenia is a highly heritable disorder that typically develops in early adult life. Structural imaging studies have indicated that patients with the illness, and to some extent their unaffected relatives, have subtle deficits in several brain regions, including prefrontal and temporal lobes. It is, however, not known how this inherited vulnerability leads to psychosis. This study used a covert verbal initiation fMRI task previously shown to elicit frontal and temporal activity (the Hayling sentence completion task) to examine this issue. A large (n = 69) number of young participants at high risk of developing schizophrenia for genetic reasons took part, together with a matched group of healthy controls (n = 21). At the time of investigation, none had any psychotic disorder, but on detailed interview some of the high-risk participants (n = 27) reported isolated psychotic symptoms. The study aimed to determine: (i) whether there were activation differences that occurred in all subjects with a genetic risk of schizophrenia (i.e. 'trait' effects); and (ii) whether there were activation differences that only occurred in those at high risk who had isolated psychotic symptoms ('state' effects). No activation differences were found in regions commonly reported to be abnormal in the established illness, namely the dorsolateral prefrontal cortex or in the temporal lobes, but group differences of apparent genetic cause were evident in medial prefrontal, thalamic and cerebellar regions. In addition, differences in activation in those with symptoms were found in the intraparietal sulcus. No significant differences in performance were found between the groups, and all subjects were antipsychotic naïve. These findings therefore suggest that vulnerability to schizophrenia may be inherited as a disruption in a fronto-thalamic-cerebellar network, and the earliest changes specific to the psychotic state may be related to hyperactivation in the parietal lobe.