Human immunodeficiency virus type 1 (HIV-1) infection of the central nervous system (CNS) can result in neurological dysfunction with devastating consequences in a significant proportion of individuals with acquired immune deficiency syndrome. HIV-1 does not infect neurons directly but induces damage indirectly through the accumulation of activated macrophage/microglia (M/M) cells, some of which are infected, that release neurotoxic mediators including both cellular activation products and viral proteins. One mechanism for the accumulation of activated M/M involves the development in infected individuals of an activated peripheral blood monocyte population that traffics through the blood-brain barrier, a process that also serves to carry virus into CNS and establish local infection. A second mechanism involves the release by infected and activated M/M in the CNS of chemotactic mediators that recruit additional monocytes from the periphery. These activated M/M, some of which are infected, release a number of cytokines and small molecule mediators as well as viral proteins that act on bystander cells and in turn activate them, thus amplifying the cascade. These viral proteins and cellular products have neurotoxic properties as well, both directly and through induction of astrocyte dysfunction, which ultimately lead to neuronal injury and death. In patients effectively treated with antiretroviral therapy, frank dementia is now uncommon and has been replaced by milder forms of neurocognitive impairment, with less frequent and more focal neuropathology. This review summarizes key findings that support the critical role and mechanisms of monocyte/macrophage activation and inflammation as a major component for HIV-1 encephalitis or HIV-1 associated dementia.