Schizophrenia is a devastating disorder with cognitive deficits in a wide variety of domains. One prominent brain-based mechanism that has been proposed to account for a wide variety of deficits seen in this group is sensory gating, which refers to the ability to suppress extraneous sensory input in the environment. Impairments in this function have also been shown to be associated with positive symptoms in schizophrenia, including auditory verbal hallucinations (AVHs), which represent a core feature of the disorder; however, the neurophysiological basis of sensory gating dysfunction and its relationship to the state and trait of experiencing AVHs remain ill-understood. Furthermore, although the finding of sensory gating impairments in schizophrenia is robust, there is a substantial amount of variability in both schizophrenia patients and healthy controls, leaving questions regarding the validity of this measure as an endophenotype for schizophrenia. Event-related potential (ERP) and evoked power (EP) indices of sensory gating were assessed in 24 patients with AVHs and 24 healthy controls stratified into high and low suppressors. In patients specifically, structural volumes for cortical regions associated with both sensory gating and auditory hallucinations were assessed, and were correlated with electrophysiological measures of sensory gating, as well as with state and trait measures of AVHs. While it was suppressor type (i.e., low vs. high suppressors) rather than group (i.e., patients vs. controls) that differentiated participants with respect to most ERP and EP measures, patients did differ in a standard ERP measure of gating ability. Analyses also showed differences in cortical volume (with an emphasis on temporal region) associations with state assessments, depending on the experimental condition in which the AVHs were experienced. Furthermore, sensory gating function (as indexed by several ERP indices) was shown to be influenced by volumes in temporal, hippocampal and anterior cingulate regions. The study revealed basic electrophysiological gating mechanisms to regulate AVH experiences. Results also point to the influence of cortical volumes in regions associated with AVHs (and the state vs. the trait of such experiences) on electrophysiological measures of sensory gating function.