This study evaluated the impact of insomnia and chronic use of benzodiazepines on the cognitive and psychomotor performance of older adults. Three conditions, matched on age, gender, and education, were compared: 20 prolonged users of benzodiazepines for insomnia, 20 unmedicated insomniacs, and 20 good sleepers. The participants completed neuropsychological tests of memory, attention/concentration, psychomotor speed, and executive functions, as well as subjective evaluations of their actual performance. Individuals with insomnia, both medicated and unmedicated, performed worse than good sleepers on the attention/concentration factor. There was no other objective evidence of performance impairments. However, unmedicated insomniacs had lower performance expectancies and subjectively rated their performance more negatively relative to medicated insomniacs and good sleepers. Both insomnia conditions also rated their performance as lower compared with their perceived potential. It is suggested that the attention/concentration difficulties experienced by medicated and unmedicated older adults with insomnia may be linked to a state of hyperarousal. The discrepancies between subjective reports of daytime deficits and objective impairments may reflect a generalized faulty appraisal of sleep and daytime functioning among individuals with insomnia complaints. The implications of those findings for the assessment and treatment of late-life insomnia are discussed.