Patients with schizophrenia tend to have impaired source monitoring and intact item recognition, suggesting an over-reliance of familiarity effects. We previously demonstrated that providing patients with a levels-of-processing (LOP) semantic encoding strategy normalized source monitoring. The current blood-oxygen-level-dependent (BOLD) functional magnetic resonance imaging (fMRI) study tests the hypothesis that patients will have abnormally increased fronto-temporal activation despite intact performance. fMRI was measured in 13 patients and 13 demographically matched healthy controls during a LOP source monitoring paradigm. SPM2 was used for standard pre-processing and statistical analyses, with a corrected significance threshold of p<.05. Examination of accuracy and speed measures did not reveal any group differences in task performance. Regardless of source retrieval success both groups activated expected prefrontal and parietal regions, with no areas of relatively greater control versus patient activation. In support of the hypothesis, patients showed abnormally increased activation in temporolimbic areas including middle and superior temporal gyrus, thalamus, and parahippocampal gyrus. Activation in these areas was associated with worse positive and negative symptoms, but did not correlate with performance, suggesting inefficient rather than compensatory activation.