Physiological measures of sensory gating are increasingly used to study biological factors associated with attentional dysfunction in psychiatric and neurologic patient populations. The present study was designed to assess sensory gating during rapid eye movement (REM) sleep in patients with schizophrenia, a population bearing a genetic load for gating impairment. Auditory event-related potentials (ERPs) were recorded in response to paired clicks during separate waking and overnight sleep recording sessions in controls and schizophrenia patients. Suppression of ERP component P50 was significantly impaired in the patient group during both waking and REM sleep, whereas the difference between groups for N100 gating was dependent on state. These results suggest that REM sleep is an appropriate state during which to assess P50 gating in order to disentangle the effects of state and trait on sensory gating impairment in other clinical populations.