Dementia and depression are the two most common mental illnesses in late life, and it is probable that they will coexist in many patients. This coexistence is complicated by the fact that both illnesses can be mistaken for each other, so that many patients with Alzheimer's disease (AD) may initially be diagnosed as depressed, whereas depression is a recognized cause of cognitive impairment. It is important to correctly differentiate between these two diagnoses; if depression is the cause of the cognitive impairment, full recovery is possible. It is also important to recognize depression in patients with AD, because depression represents a treatable source of additional disability. For patients with AD living in the community, functional limitation can determine whether the patient remains at home or is institutionalized, so treatment that can improve functional ability should be strongly considered. The newer antidepressants are better tolerated without increase in cost, so these drugs may provide a therapeutic advantage over the older tricyclic drugs. This article focuses primarily on techniques for establishing a differential diagnosis, with particular emphasis on patients in the primary care setting, and briefly considers the value and impact of treatment.