This study compared the functioning of 188 elderly schizophrenic and bipolar disorder patients living in nursing homes and the community. Residential status and diagnostic groups were compared on measures of symptomatology, cognitive impairment, functional impairment, and behavior problems. In general, the diagnostic groups differed in symptoms, while most differences in living setting were related to cognition, functioning, and behavior. Nursing home status was significantly associated with more severe overall symptom ratings, worse cognitive impairment, greater functional impairment, more aggressive behaviors, and marital status of having never married. Self-care skills, community living skills, and marital status were most uniquely predictive of nursing home residence. However, cognitive deficits were strongly predictive of both self-care and community living skills, explaining approximately half of the variance in these variables. The implications of these findings for the treatment of elderly patients with schizophrenia and other severe mental illnesses are discussed.