While the role of neurocognitive impairment in predicting functional outcome in chronic schizophrenia is now widely accepted, the results that have examined this relationship in the early phase of psychosis are surprisingly rather mixed. The predictive role of cognitive impairment early in the illness is of particular interest because interventions during this initial period may help to prevent the development of chronic disability. In a University of California, Los Angeles (UCLA) longitudinal study, we assessed schizophrenia patients with a recent first episode of psychosis using a neurocognitive battery at an initial clinically stabilized outpatient point and then followed them during continuous treatment over the next 9 months. Three orthogonal cognitive factors were derived through principal components analysis: working memory, attention and early perceptual processing, and verbal memory and processing speed. All patients were provided a combination of maintenance antipsychotic medication, case management, group skills training, and family education in a UCLA research clinic. A modified version of the Social Adjustment Scale was used to assess work outcome. Multiple regression analyses indicate that the combination of the 3 neurocognitive factors predicts 52% of the variance in return to work or school by 9 months after outpatient clinical stabilization. These data strongly support the critical role of neurocognitive factors in recovery of work functioning after an onset of schizophrenia. Cognitive remediation and other interventions targeting these early cognitive deficits are of major importance to attempts to prevent chronic disability.