Evoked and induced event-related neural oscillations have recently been proposed as a key mechanism supporting higher-order cognition. Cognitive decay and abnormal electromagnetic sensory gating reliably distinguish schizophrenia (SZ) patients and healthy individuals, demonstrated in chronic (CHR) and first-admission (FA) patients. Not yet determined is whether altered event-related modulation of oscillatory activity is manifested at early stages of SZ, thus reflects and perhaps embodies the development of psychopathology, and provides a mechanism for the gating deficit. The present study compared behavioral and functional brain measures in CHR and FA samples. Cognitive test performance (MATRICS Consortium Cognitive Battery, MCCB), neuromagnetic event-related fields (M50 gating ratio), and oscillatory dynamics (evoked and induced modulation of 8–12Hz alpha) during a paired-click task were assessed in 35 CHR and 31 FA patients meeting the criteria for ICD-10 diagnoses of schizophrenia as well as 28 healthy comparison subjects (HC). Both patient groups displayed poorer cognitive performance, higher M50 ratio (poorer sensory gating), and less induced modulation of alpha activity than did HC. Induced alpha power decrease in bilateral posterior regions varied with M50 ratio in HC but not SZ, whereas orbitofrontal alpha power decrease was related to M50 ratio in SZ but not HC. Results suggest disruption of oscillatory dynamics at early stages of illness, which may contribute to deficient information sampling, memory updating, and higher cognitive functioning.