Frontal-subcortical cognitive and limbic feedback loops modulate higher cognitive functioning. The final step in these feedback loops is the thalamo-cortical projection through the anterior limb of the internal capsule (AL-IC). Using diffusion tensor imaging (DTI), we evaluated abnormalities in the AL-IC fiber tract in schizophrenia. Participants comprised 16 chronic schizophrenia patients and 19 male, normal controls, who were group matched for handedness, age, and parental socioeconomic status, and underwent DTI on a 1.5 Tesla GE system. We measured the diffusion indices, fractional anisotropy (FA), mean diffusivity (MD), radial diffusivity (RD), and axial diffusivity (AD), and manually segmented, based on FA maps, AL-IC volume, normalized for intracranial contents (ICC). The results showed a significant reduction in the ICC-corrected volume of the AL-IC in schizophrenia, but did not show diffusion measure group differences in the AL-IC in FA, MD, RD or AD. In addition, in the schizophrenia patients, AL-IC FA correlated positively with performance on measures of spatial and verbal declarative/episodic memory, and right AL-IC ICC-corrected volume correlated positively with more perseverative responses on the Wisconsin Card Sort Test (WCST). We found a reduction in AL-IC ICC-corrected volume in schizophrenia, without FA, MD, RD or AD group differences, implicating the presence of a structural abnormality in schizophrenia in this subcortical white matter region which contains important cognitive, and limbic feedback pathways that modulate prefrontal cortical function. Despite not demonstrating a group difference in FA, we found that AL-IC FA was a good predictor of spatial and verbal declarative/episodic memory performance in schizophrenia.