Evidence suggests that high nicotine dependence observed in schizophrenia is related to its core neuronal deficits such as abnormalities in neural synchronization and sensory gating. Some of these neuronal deficits are shown to mark schizophrenia liability, raising the possibility that the increased nicotine dependence in schizophrenia is related to its etiological factors. This study sought to investigate mechanisms of increased vulnerability to smoking and nicotine dependence in schizophrenia. The individual and interacting effects of familial vulnerability factors, neurophysiological function, and resting cortical oscillatory activity (i.e. resting EEG power) were examined. The study sample was composed of four groups including outpatients with schizophrenia, first-degree relatives of patient index probands, healthy comparison control subjects from the community, and first-degree relatives of control probands. The resulting data demonstrated a pattern of more persistent nicotine use and greater dependence among those with schizophrenia relative to non-psychiatric comparison controls. Persistent smoking was also demonstrated to be highly heritable across groups with no discernable difference in the extent to which smoking is familial in those affected or unaffected by schizophrenia. With respect to resting oscillatory activity, analyses failed to find diagnostic group differences in EEG power for the alpha, beta, and gamma frequency bands and, unlike other substances of abuse, past and present nicotine use did not have a reliable effect on power in the beta frequency band. Rather, power in the gamma frequency band was significantly associated with smoking status. Furthermore, smoking was uniquely related to neurophysiological processes in probands with schizophrenia, suggesting that smoking status should be assessed in any study of information-processing dysfunction in this population. When all putative susceptibility factors were considered together, diagnosis of schizophrenia and family history of smoking best captured what may be characterized as an underlying (i.e. neurobiological) vulnerability to nicotine dependence, rather than circumscribed indices of electrophysiological functioning. Future studies might be implemented to refine the association between smoking and indices of electrophysiological function and, importantly, relate diagnostic or electrophysiological susceptibility factors to mediating processes and observable behaviors associated with aberrant patterns of nicotine use and dependence in persons with schizophrenia.