Background: A recent modeling study by the authors predicted that contextual information is poorly integrated into episodic representations in schizophrenia, and that this is a main cause of the retrieval deficits seen in schizophrenia. Methodology/Principal Findings: We have tested this prediction in patients with first-episode schizophrenia and matched controls. The benefit from contextual cues in retrieval was strongly reduced in patients. On the other hand, retrieval based on item cues was spared. Conclusions/Significance: These results suggest that reduced integration of context information into episodic representations is a core deficit in schizophrenia and one of the main causes of episodic memory impairment.