This study examined the neurophysiological effects of acoustic degradation on auditory semantic processing. Event-related potentials were recorded to target words presented in a sentence context. Targets were semantically congruent or incongruent with the context, which was acoustically intact or low-pass filtered. In unaltered contexts, N400 amplitude was significantly greater for incongruent than congruent words. Filtering significantly reduced this effect, even though participants were highly accurate in interpreting the degraded stimuli, as shown by an anomaly detection task. This reduction in the N400 effect appeared to be driven by decreased N400 amplitudes over posterior electrode sites for incongruent targets. These results demonstrate that acoustic degradation influences the neural response to words in context by reducing the availability of semantic information in on-line sentence comprehension.