Alzheimer's disease (AD) is accompanied by smell dysfunction, as measured by psychophysical tests. Currently, it is unknown whether AD-related alterations in central olfactory system neural activity, as measured by functional magnetic resonance imaging (fMRI), are detectable beyond those observed in healthy elderly. Moreover, it is not known whether such changes are correlated with indices of odor perception and dementia. To investigate these issues, 12 early stage AD patients and 13 nondemented controls underwent fMRI while being exposed to each of three concentrations of lavender oil odorant. All participants were administered the University of Pennsylvania Smell Identification Test (UPSIT), the Mini-Mental State Examination (MMSE), the Mattis Dementia Rating Scale-2 (DRS-2), and the Clinical Dementia Rating Scale (CDR). The blood oxygen level-dependent (BOLD) signal at primary olfactory cortex (POC) was weaker in AD than in HC subjects. At the lowest odorant concentration, the BOLD signals within POC, hippocampus, and insula were significantly correlated with UPSIT, MMSE, DRS-2, and CDR scores. The BOLD signal intensity and activation volume within the POC increased significantly as a function of odorant concentration in the AD group, but not in the control group. These findings demonstrate that olfactory fMRI is sensitive to the AD-related olfactory and cognitive functional decline.