Abnormalities in oscillations have been suggested to play a role in schizophrenia. We studied theta-modulated gamma oscillations in a computer model of hippocampal CA3 in vivo with and without simulated application of ketamine, an NMDA receptor antagonist and psychotomimetic. Networks of 1200 multicompartment neurons [pyramidal, basket, and oriens-lacunosum moleculare (OLM) cells] generated theta and gamma oscillations from intrinsic network dynamics: basket cells primarily generated gamma and amplified theta, while OLM cells strongly contributed to theta. Extrinsic medial septal inputs paced theta and amplified both theta and gamma oscillations. Exploration of NMDA receptor reduction across all location combinations demonstrated that the experimentally observed ketamine effect occurred only with isolated reduction of NMDA receptors on OLMs. In the ketamine simulations, lower OLM activity reduced theta power and disinhibited pyramidal cells, resulting in increased basket cell activation and gamma power. Our simulations predict the following: (1) ketamine increases firing rates; (2) oscillations can be generated by intrinsic hippocampal circuits; (3) medial-septum inputs pace and augment oscillations; (4) pyramidal cells lead basket cells at the gamma peak but lag at trough; (5) basket cells amplify theta rhythms; (6) ketamine alters oscillations due to primary blockade at OLM NMDA receptors; (7) ketamine alters phase relationships of cell firing; (8) ketamine reduces network responsivity to the environment; (9) ketamine effect could be reversed by providing a continuous inward current to OLM cells. We suggest that this last prediction has implications for a possible novel treatment for cognitive deficits of schizophrenia by targeting OLM cells.