Two recently completed large, randomised, double-blind, placebo-controlled trials supporting the efficacy of carbamazepine (CBZ) extended-release capsules (ERC) for the treatment of acute manic and mixed episodes have resulted in US FDA approval of CBZ-ERC, and have reinvigorated the importance of understanding the role of CBZ in bipolar disorder (BD) pharmacotherapy. Additional data suggest that CBZ may have a use in BD maintenance treatment and possibly in acute BD depression. Optimal use of CBZ requires sound knowledge of adverse effects and pharmacokinetic interactions with this agent. Adverse effects commonly involve benign side effects but can rarely include serious haematological, dermatological and hepatic manifestations. On the other hand, metabolic adverse effects (thyroid, glucose, lipid disturbances and significant weight gain) can be less problematic with CBZ, compared with lithium, valproate and atypical antipsychotics. Pharmacokinetic considerations (cytochrome P450 3A3/4 metabolism, active epoxide metabolite and catabolic enzyme induction) can influence the clinical use of CBZ. Managing adverse effects and pharmacokinetic complexities is important for optimising pharmacotherapy with CBZ in patients with BD. This paper reviews the chemistry, pharmacodynamics and pharmacokinetics of CBZ, as well as reviews of the controlled trials of CBZ in acute bipolar mania, acute bipolar depression and bipolar maintenance treatment.