Neurobiological theories of schizophrenia and related psychoses have increasingly emphasized impaired neuronal coordination (i.e., dysfunctional connectivity) as central to the pathophysiology. Although neuroimaging evidence has mostly corroborated these accounts, the basic mechanism(s) of reduced functional connectivity remains elusive. In this study, we examine the developmental trajectory and underlying mechanism(s) of dysfunctional connectivity by using gamma oscillatory power as an index of local and long-range circuit integrity. An early-onset psychosis group and a matched cohort of typically developing adolescents listened to monaurally presented click-trains, as whole-head magnetoencephalography data were acquired. Consistent with previous work, gamma-band power was significantly higher in right auditory cortices across groups and conditions. However, patients exhibited significantly reduced overall gamma power relative to controls, and showed a reduced ear-of-stimulation effect indicating that ipsi- versus contralateral presentation had less impact on hemispheric power. Gamma-frequency oscillations are thought to be dependent on gamma-aminobutyric acidergic interneuronal networks, thus these patients' impairment in generating and/or maintaining such activity may indicate that local circuit integrity is at least partially compromised early in the disease process. In addition, patients also showed abnormality in long-range networks (i.e., ear-of-stimulation effects) potentially suggesting that multiple stages along auditory pathways contribute to connectivity aberrations found in patients with psychosis.