Distortion of the sense of reality, actualized in delusions and hallucinations, is the key feature of psychosis but the underlying neuronal correlates remain largely unknown. We studied 11 highly functioning subjects with schizophrenia or schizoaffective disorder while they rated the reality of auditory verbal hallucinations (AVH) during functional magnetic resonance imaging (fMRI). The subjective reality of AVH correlated strongly and specifically with the hallucination-related activation strength of the inferior frontal gyri (IFG), including the Broca’s language region. Furthermore, how real the hallucination that subjects experienced was depended on the hallucination-related coupling between the IFG, the ventral striatum, the auditory cortex, the right posterior temporal lobe, and the cingulate cortex. Our findings suggest that the subjective reality of AVH is related to motor mechanisms of speech comprehension, with contributions from sensory and salience-detection-related brain regions as well as circuitries related to self-monitoring and the experience of agency.