OBJECTIVE: A number of recent studies have questioned whether, despite modern treatment, the natural course of bipolar illness today still involves multiple relapses and impaired psychosocial functioning. This prospective follow-up study examined longitudinal outcome in a large group of inpatients with affective disorders. METHOD: Fifty-one bipolar manic patients and 49 unipolar depressed patients were interviewed three times: 1) during hospitalization, 2) approximately 2 years after discharge, and 3) approximately 4.5 years after discharge. Subjects were treated under routine conditions and assessed for global adjustment, rehospitalization, and work and social functioning. RESULTS: Only 41% of the bipolar group had a good overall outcome by the time of the 4.5-year follow-up. The bipolar patients had more severe work impairment than the unipolar group. More than one-half of the bipolar patients were rehospitalized at least once during the 4.5- year follow-up period. Outcome for both diagnostic groups improved significantly over time. CONCLUSIONS: Many contemporary bipolar patients demonstrate gradual improvement in the first several years after hospitalization. However, a subgroup approaching 60% still experience poor posthospital adjustment in one or more areas of functioning.