In a prospective study to determine the incidence of clinical dementia in patients with AIDS and ARC, 29 men and 3 women, 19 with ARC and 13 with AIDS, were examined neurologically and neuropsychologically every 6 months for 2 years during a placebo-controlled zidovudine (AZT) licensing trial. Most received two MRI brain scans. Although no patient was clinically demented at baseline, 9 (28%) developed dementia during the 2 years. Progression to dementia was associated with neuropsychological deterioration and with worsening on MRI during a preceding 6-month period, but not with baseline treatment group assignment. The results suggest that patients at CDC Stage IV who do not receive antiretroviral treatment earlier in their illness may develop clinical dementia at an annual rate of about 14%.