A number of studies, using different research designs and assessment instruments, have been conducted to elucidate the differential effects of drug treatments for psychosis, agitation and aggression in elderly patients with dementia. We have reviewed literature published from 1960 to 2000 on this topic; 48 studies that met our selection criteria were identified from Medline and Science Citation Index. Antipsychotic medication was generally effective for the treatment of psychosis and agitation in elderly patients with dementia. In double-blind, placebo-controlled trials in this population, mean improvement rates were 61% with antipsychotics and 35% with placebo. Atypical antipsychotics appeared promising, but the number of well-designed studies has been small so far. Methodological limitations of the studies reviewed are discussed; future trials should ensure adequate sample size and duration and involve direct comparisons of individual medications. In conclusion, conventional antipsychotics are modestly effective for treatment of psychosis and agitation in elderly individuals with dementia, whereas newer treatments such as atypical antipsychotics appear to be at least as effective while having fewer adverse effects. Nonetheless, there is no currently available ideal pharmacotherapy, and psychosocial management is a necessary part of overall treatment. Additional large-scale, well-controlled studies are needed before conclusive statements regarding the value of treatment of psychosis and agitation with atypical antipsychotics and non-antipsychotic agents can be made.