In line with emerging research strategies focusing on specific symptoms rather than global syndromes in psychiatric disorders, we examined the functional neural correlates of auditory verbal hallucinations (AHs) in schizophrenia. Recent neuroimaging and behavioural evidence suggest altered early cognitive processes may be seen in patients with AH as a result of limited processing resources. The P3a subcomponent of the P300, an event-related potential (ERP) index of early attention switching, was assessed in 12 hallucinating patients (HP), 12 non-hallucinating patients (NP) and 12 healthy controls (HC) within a passive two-tone auditory oddball paradigm using vowel phonemes. P3a amplitudes and latencies were measured in response to across-phoneme changes. Following P3a acquisition, patients indicated the duration, intensity and clarity of their auditory hallucinations during recording. Hallucinating patients exhibited smaller P3a amplitudes than non-hallucinating patients and healthy controls. In HPs, P3a amplitude was negatively correlated with AH trait scores. These findings suggest that AHs are associated with impaired processing of speech as evidenced by altered P3a amplitudes to vowel phonemes. This finding may be due to limited cognitive resources available for incoming external stimuli due to a usurping of finite resources by AHs. The P3a may be a useful non-invasive tool for probing relationships between hallucinatory and neural states within schizophrenia and the manner in which auditory processing is altered in these afflicted patients. Copyright © 2010 Elsevier B.V. All rights reserved.