Objective: Past investigations indicate facial emotion-processing abnormalities in pediatric bipolar disorder (PBD) subjects. However, the extent to which these deficits represent state- and trait-related factors is unclear. We investigated facial affect processing in acutely ill and clinically stabilized children with PBD and matched healthy subjects. Method: Subjects (N = 86) consisted of unmedicated/acutely ill (n = 29) and medicated/clinically stabilized (n = 29) PBD youths and matched healthy subjects (n = 28) who completed tasks of facial affect identification and differentiation. Results: Subjects with PBD, regardless of clinical and treatment status, showed marked impairments in the ability to correctly identify emotionally intense happy and sad facial expressions, with both groups tending to misjudge extreme facial expressions as being moderate to mild in intensity. However, when differentiating subtle variations of happy or sad expressions, only unmedicated/acutely ill PBD patients performed more poorly than healthy subjects. Younger age at onset was associated with more impaired emotion processing only in the PBD sample. PBD subjects with comorbid attention-deficit/hyperactivity disorder (ADHD) performed more poorly than subjects without ADHD when processing sad facial expressions, but not happy ones. Conclusions: This study found evidence of both state-of-illness and trait-related deficits in emotion processing in PBD. Treatments are needed to better reduce this impairment and to reduce its developmental impact on interpersonal functioning. (Contains 3 tables and 3 figures.)