Animal models of psychosis propose that abnormal hippocampal activity drives increased subcortical dopamine function, which is thought to contribute to aberrant salience processing and psychotic symptoms. These effects appear to be mediated through connections between the hippocampus, ventral striatum/pallidum and the midbrain. The aim of the present study was to examine the activity and connectivity in this pathway in people at ultra high risk (UHR) for psychosis. Functional magnetic resonance imaging was used to compare neural responses in a hippocampal-basal ganglia-midbrain network during reward, novelty and aversion processing between 29 UHR subjects and 32 healthy controls. We then investigated whether effective connectivity within this network is perturbed in UHR subjects, using dynamic causal modelling (DCM). Finally, we examined the relationship between alterations in activation and connectivity in the UHR subjects and the severity of their psychotic symptoms. During reward anticipation, UHR subjects showed greater activation than controls in the ventral pallidum bilaterally. There were no differences in activation during novelty or aversion processing. DCM revealed that reward-induced modulation of connectivity from the ventral striatum/pallidum to the midbrain was greater in UHR subjects than controls, and that in UHR subjects, the strength of connectivity in this pathway was correlated with the severity of their abnormal beliefs. In conclusion, ventral striatal/pallidal function is altered in people at UHR for psychosis and this is related to the level of their psychotic symptoms.