Diagnostic classification systems are designed to identify clinical conditions that produce significant decrements in functional status. Historically, there has been a tendency to consider conditions that fall below threshold levels as temporary phenomena that do not interfere with daily functioning. However, dismissing subthreshold symptoms may be particularly problematic for older adults. The present study examined the relationship between depression, anxiety, and decrements in functional status among older adults using both continuous and categorical diagnostic approaches. One hundred veterans were recruited from the Veterans Health Study, a longitudinal investigation of male veterans' health. Participants completed screening measures of depression, anxiety, functional status, medical comorbidity, and the SCID anxiety and mood modules. One-quarter of the sample met DSM-IV criteria for one of the targeted mood or anxiety disorders. Continuous and categorical measures of depression were significantly related to decrements in functional status above and beyond comorbid medical conditions. A significant association was found between anxiety symptoms (per continuous measure) and decrements in functional status. This finding suggests that anxious symptoms are related to decrements in work, self-care, and leisure activities. Moreover, the results indicate that continuous measures of anxiety that focus on severity of symptoms rather than the presence or absence of a disorder, may be a more appropriate for assessing late-life anxiety. Health care professionals who treat older adults should not dismiss anxious or depressive symptoms among frail older adults as merely a natural outcome of aging or disease. Efforts to reduce decrements in functional status experienced by older adults with anxious and depressive symptoms should focus on educating health care providers to recognize and treat the full spectrum of anxiety and depressive syndromes.