Background In paper I we reported that depression in the acute stage remitted in line with the psychosis and that 36% of patients developed post-psychotic depression (PPD). Aims We apply our cognitive framework to PPD and chart the appraisal of self and psychosis and their link with the later emergence of PPD. Method Patients with ICD-IO schizophrenia (n=105) were followed up over 12 months following the acute episode, taking measures of depression, working self-concept, cognitive vulnerability, insight and appraisals of psychosis. Results Before developing PPD,these patients felt greater loss, humiliation and entrapment by their illness than those who relapsed or did not become depressed, and were more likely to see their future selves in 'lower status' roles. Upon becoming depressed. participants developed greater insight, lower self-esteem and a worsening of their appraisals of psychosis. Conclusions Depression in psychosis arises from the individual's appraisal of psychosis and its implications for his/her perceived social identity, position and 'group fit'. Patients developing PPD feel forced to accept a subordinate role without opportunity for escape. Implications for treatment are discussed.