Research on predicting and preventing episodes of schizophrenia and mood disorder lacks consistent, specific definitions of episodes. We present an operational system for identifying relapse, exacerbation, and remission of schizophrenia and bipolar disorder within longitudinal studies that involve repeated symptom assessments. Three major classes of episodic outcome are defined: relapse or significant exacerbation, nonrelapse, and stable, severe persisting symptoms. These major classes are further subdivided to distinguish nine categories of episodic outcome. To examine ease of use, interrater reliability, and validity, the classification system was applied to recent-onset samples of schizophrenia patients (N=77) and bipolar mood disorder patients (N=23) followed on medication for 9- to 12-month periods. A range of episodic outcomes were distinguished with high interrater reliability. Despite being prescribed continuous medication, 21% of the recent-onset schizophrenia patients and 61% of bipolar patients met criteria for relapse or significant exacerbation during this follow-up period. Predictive relationships support the validity of this system for classifying episodes. A computer program is available to facilitate its use. Use of these explicit definitions of episodes may help to clarify the relationship between episodic outcome and other fundamental domains of illness outcome, particularly other symptom dimensions, work functioning, and social functioning.