Patients with established schizophrenia perform poorly on attentional set-shifting tasks, due to a failure of inhibitory control and/or perseverative errors. However, attentional set-shifting is also dependent on working memory capacity, which is additionally impaired in schizophrenia. No studies in first-episode psychosis have specifically examined the contribution of working memory to set-shifting ability in schizophrenia. We investigated 48 first-episode schizophreniform psychosis/schizophrenia (FE) and 40 chronic schizophrenia (CHR) patients, compared to 67 comparable healthy subjects (CTL). All subjects were assessed using the CANTAB 'attentional set-shifting (IDED)' and 'spatial working memory (SWM)' tasks. Both FE and CHR made significantly greater errors on the SWM task (p< or =0.001). Compared with CTL, CHR was more likely to fail at intra-dimensional (p<0.05) and extra-dimensional (p<0.01) shifting and reversal stages of IDED; CHR required significantly greater trials to reach criterion, which was not explained by deficits in SWM (p<0.001). FE did not differ from CTL on IDED level reached. However, FE required significantly more trials (p=0.001); this was no longer significant after controlling for SWM deficits (p>0.05). Given that the capacity to be flexible and shift attentional set is intact only at the early stages of illness, 'neurodegenerative' processes may explain the more severe deficits in chronic schizophrenia. In contrast, deficits in SWM identified at all stages of schizophrenia may reflect incomplete maturation prior to illness onset ('neurodevelopmental arrest'). Longitudinal studies assessing these cognitive functions from illness onset or in prepsychotic individuals are required.