The effects of functional decline upon social networks, life satisfaction, and depression were observed and statistically tested in a longitudinal prospective design. Subjects were 692 Japanese elderly, aged sixty-five years or older, with high functional capacity at baseline. During a two-year period of follow-up, 12.3 percent of the subjects experienced functional decline. Repeated-measure analyses of covariance with statistical tests for simple main effects revealed that changes in the criterion variables significantly differed along with changes in functional health status when the effects of age, gender, and socioeconomic status were controlled. The subjects who experienced functional decline showed a larger decrease in the number of relatives, friends, and neighbors having frequent contacts, a larger decline in life satisfaction, and a larger increase in depression than those without functional decline. The results seem to confirm further the importance of functional health status as a prerequisite for higher quality of life in old age.