A prospective cohort study of schizophrenia was carried out in Sao Paulo, Brazil, in order to investigate clinical and social outcomes in schizophrenia and related psychoses after hospitalization. A sample of 124 individuals who were living in a defined catchment area and had been consecutively admitted to psychiatric hospitals in that area with clinical diagnoses of non-affective functional psychoses was followed up for 2 years. Assessments of clinical status and social adjustment at inclusion and at 2-year follow-up were carried out by means of standardized instruments, the PSE and the DAS. At the end of the follow-up period, 120 subjects (96.8%) were traced, and 103 (83.1%) were re-assessed. At the second assessment, the proportion of subjects with a nuclear syndrome of schizophrenia had halved (from 68.3% to 32.7%), 23.8% were symptom free and 60.2% showed at least one psychotic symptom. Presence of psychotic symptoms at follow-up was best predicted by educational level (less than 4 years of formal education) and an initial DSM-III-R diagnosis of schizophrenia. The distribution of global social adjustment levels at 2-year follow-up was similar to that observed at the outset, with approximately one third of subjects showing good, one third showing intermediate and one third showing poor global social adjustment. Social disability was best predicted by longer duration of illness, worse social adjustment levels at inclusion and lower educational level.