A recent body of literature on the subjective experience of severe mental illness has reported on the importance of a person’s self-esteem. Using a longitudinal design, this study investigates the relationship between self-esteem and functioning during the first year after being hospitalized for psychosis. The findings are based on comprehensive assessments conducted over a 1-year period with 43 persons hospitalized for schizophrenia and related disorders. Results reveal that change in level of self-esteem is significantly related to outcome. These results emphasize the importance of helping patients sustain positive self-esteem in the midst of disorder and treatment.