A cognitive-behavioral therapy (CBT) program for posttraumatic stress disorder (PTSD) was developed to address its high prevalence in persons with severe mental illness receiving treatment at community mental health centers. CBT was compared with treatment as usual (TAU) in a randomized controlled trial with 108 clients with PTSD and either major mood disorder (85%) or schizophrenia or schizoaffective disorder (15%), of whom 25% also had borderline personality disorder. Eighty-one percent of clients assigned to CBT participated in the program. Intent-to-treat analyses showed that CBT clients improved significantly more than did clients in TAU at blinded posttreatment and 3- and 6-month follow-up assessments in PTSD symptoms, other symptoms, perceived health, negative trauma-related beliefs, knowledge about PTSD, and case manager working alliance. The effects of CBT on PTSD were strongest in clients with severe PTSD. Homework completion in CBT predicted greater reductions in symptoms. Changes in trauma-related beliefs in CBT mediated improvements in PTSD. The findings suggest that clients with severe mental illness and PTSD can benefit from CBT, despite severe symptoms, suicidal thinking, psychosis, and vulnerability to hospitalizations. (Contains 4 tables, 1 figure, and 1 footnote.)