The effectiveness of hospital-based treatment models for personality disorder is still uncertain. To compare effectiveness of two models of psychosocial intervention for personality disorder. Two samples of people with personality disorder allocated to a one-stage treatment model (in-patient treatment with no after care) and to a two-stage model (shorter in-patient admission followed by outreach therapy) are prospectively compared. Subjects in the two-stage sample did significantly better on global assessment of mental health (according to the Global Assessment Score (GAS)) at 6 and 12 months and on social adjustment (according to the Social Adjustment Scale (SAS)) at 12 months. Significant differences in rates of reliable improvement on the GAS (43% v. 17%) and SAS (39% v. 15%) in favour of the two-stage condition were found at 12 months. Subjects with borderline personality disorder (BPD) allocated to the two-stage model improved significantly more than such patients in the one-stage model. A long-term phased model which combines hospital-based and community-based strategies has advantages over a purely in-patient model for the treatment of BPD.