Over the past decade substantial advances have been made in the psychiatric rehabilitation of persons with severe mental illnesses such as schizophrenia and bipolar disorder. In this review we highlight progress in several areas that have been the focus of extensive research, including case management, social skills training, supported employment, family intervention, and integrated treatment for comorbid substance use disorders. We also identify characteristics of successful psychiatric rehabilitation programs: (1) effective interventions tend to be direct and behavioral; (2) rehabilitation programs have specific effects on related outcomes, with limited generalization to other domains; (3) short-term interventions are less effective than long-term ones; (4) interventions need to be delivered close to patients' natural environments; and (5) effective programs often combine skills training and environmental support.