While alcohol-induced psychotic disorder (AIPD) is well recognised, relatively little is known about the condition. We undertook a review of the literature to identify studies on the epidemiology, clinical manifestations, underlying neurobiology and treatment of AIPD. Few prospective studies have been conducted on AIPD. Recent advances have focussed on epidemiological, phenomenological, neuro-imaging, treatment and outcome issues. Current evidence suggests AIPD can be clinically distinguished from alcohol-withdrawal delirium and schizophrenia. The disorder may be more common than previously recognised depending on the inclusion criteria applied. AIPD is associated with high co-morbidity with other psychiatric disorders, high re-hospitalization and mortality rates and suicidal behaviour. Concurrent dysregulation of several neurotransmitter systems may be involved in the pathogenesis of hallucinations in alcohol dependence, and neuro-imaging studies suggest perfusion abnormalities to various brain regions. Antipsychotic treatment remains the preferred treatment for AIPD. The prognosis appears less favourable than previously believed, yet usually good when abstinence can be maintained.