Objectives : to estimate costs associated with dementia and its severity and to identify main cost determinants. Design : one-year prospective cohort study. Setting : 231 general practitioners (GPs) and 15 specialist clinics throughout Belgium. Subjects : 605 patients aged greater than or equal to 65 years (219 referent patients, 218 demented patients at home and 168 demented patients in institution). Outcome measures : medical costs (visits to GPs/specialists, physiotherapy, hospitalisation, nursing, incontinence, medication) and non-medical costs (special equipment, services, professional help and caregiving). Results : total monthly costs amounted to 368.50 Euro for referent patients, 445.56 Euro for demented patients at home and 2301.7 Euro for demented patients in institutions. Highest costs were measured in patients with severe dementia (556 88 Euro at home, 2465.28 Euro in institutions). In demented patients at home, 60% of costs were accounted for by the health system,, with hospitalisation and medication being the main cost components (36% and 20%). In demented patients in institution, 46% of the costs were accounted for by the health system, with residential costs and nursing being the main cost components (42% and 32%). In multivariate covariance analysis, the main determinants of costs for demented patients at home were physical dependence and co-morbidity (neoplasm, cardiovascular disease). The adjusted difference between demented and referent patients was 25 Euro per month. Conclusions : a large fraction of the costs observed in dementia is explained by the association of dementia with physical dependence, co-morbidity and need for caregiving. From an economic point of view, the results support the caring for patients at home.