Infection by the human immunodeficiency virus type 1 (HIV‐1) often results in neurological dysfunction including HIV dementia (HIVD). Alterations in cytokine and redox balance are thought to play important roles in the pathogenesis of HIVD, but the specific mechanisms underlying neuronal dysfunction and death are unknown. Activation of cytokine receptors and oxidative stress can induce the production of ceramide from membrane sphingomyelin, and recent findings suggest that ceramide is an important mediator of a form of programmed cell death called apoptosis. We now report that levels of ceramide, sphingomyelin, and hydroxynonenal (HNE) are significantly increased in brain tissues and cerebrospinal fluid of HIVD patients. Exposure of cultured neurons to the neurotoxic HIV proteins gp120 and Tat resulted in increased cellular levels of sphingomyelin, ceramide, and HNE. The ceramide precursor palmitoyl‐CoA sensitized neurons to Tat and gp120 toxicity, whereas an inhibitor of ceramide production reduced Tat and gp120‐induced increases of ceramide and HNE and protected the neurons from Tat and gp120‐induced death. These results suggest that HIV‐1 infection may promote a lipid imbalance in neural cells, resulting in an overproduction of ceramide and consequent cellular dysfunction and death.