To determine the extent of changes in women's sexual functioning and well-being during the menopausal transition and the relationship to hormonal changes. Prospective observational study. Population-based sample assessed at home. 438 Australian-born women 45-55 of years who were still menstruating at baseline. Of these, 226 were studied for effects of hormones on sexual functioning. Short Personal Experiences Questionnaire (SPEQ) and Affectometer 2 scores and annual blood sampling. From the early to late menopausal transition, the percentage of women with SPEQ scores indicating sexual dysfunction increased from 42% to 88%. Mood scores did not change significantly. In the early menopausal transition, women with low total SPEQ scores had lower estradiol level but similar androgen levels to those with higher scores. Decreasing SPEQ scores correlated with decreasing estradiol level but not with androgen levels. Hormone levels were not related to mood scores. Female sexual functioning declines with the natural menopausal transition. This decline relates more to decreasing estradiol levels than to androgen levels.