Prepulse inhibition (PPI) refers to a reduction in the amplitude of the startle eyeblink reflex to a strong sensory stimulus, the pulse, when it is preceded shortly by a weak stimulus, the prepulse. PPI is a measure of sensorimotor gating which serves to prevent the interruption of early attentional processing and it is impaired in schizophrenia-spectrum patients. In healthy individuals, PPI is more robust when attending to than ignoring a prepulse. Animal and human work demonstrates that frontal-striatal-thalamic (FST) circuitry modulates PPI. This study used functional magnetic resonance imaging (fMRI) to investigate FST circuitry during an attention-to-prepulse paradigm in 26 unmedicated schizophrenia-spectrum patients (13 schizotypal personality disorder (SPD), 13 schizophrenia) and 13 healthy controls. During 3T-fMRI acquisition and separately measured psychophysiological assessment of PPI, participants heard an intermixed series of high- and low-pitched tones serving as prepulses to an acoustic-startle stimulus. Event-related BOLD response amplitude curves in FST regions traced on co-registered anatomical MRI were examined. Controls showed greater activation during attended than ignored PPI conditions in all FST regions-dorsolateral prefrontal cortex (Brodmann areas 46, 9), striatum (caudate, putamen), and the thalamic mediodorsal nucleus. In contrast, schizophrenia patients failed to show differential BOLD responses in FST circuitry during attended and ignored prepulses, whereas SPD patients showed greater-than-normal activation during ignored prepulses. Among the three diagnostic groups, lower left caudate BOLD activation during the attended PPI condition was associated with more deficient sensorimotor gating as measured by PPI. Schizophrenia-spectrum patients exhibit inefficient utilization of FST circuitry during attentional modulation of PPI. Schizophrenia patients have reduced recruitment of FST circuitry during task-relevant stimuli, whereas SPD patients allocate excessive resources during task-irrelevant stimuli. Dysfunctional FST activation, particularly in the caudate may underlie PPI abnormalities in schizophrenia-spectrum patients.