With the aging of the population, functional decline is one of the major challenges to health care systems. The objective of this study was to estimate the incidence of functional decline and improvement in a community-dwelling population of people aged 75 years and above. A representative sample of elderly people living at home in the city of Sherbrooke (Québec, Canada) was assessed yearly on three occasions (1991-1993) by a nurse. Disabilities were measured by the Functional Autonomy Measurement System, a 29-item rating scale developed according to the World Health Organization classification of disabilities. From the 655 subjects who agreed to participate, a total of 572 subjects completed the study, including 68 who subsequently died. The probability of declining was 20.1% for the first year and 12.4% for the second year. The incidence of functional decline among previously stable subjects was 11.9% (95% confidence interval (CI) 8.9-15.9). Age was strongly related to decline (relative risk (RR) = 1.15/year, 95% CI 1.09-1.21), but there was no significant sex effect (RRmale = 0.88, 95% CI 0.55-1.39). The incidence of improvement among previously disabled subjects was estimated at 7.5% (95% CI 5.1-10.9) for the first year and 17.9% (95% CI 14.0-23.0) for the second year. Neither age (RR = 1.07, 95% CI 0.99-1.15) nor sex (RRmale = 1.70, 95% CI 0.90-3.18) was significantly associated with the probability of improving. This study stresses the importance of precise measurement of disabilities and the complex and dynamic process of functional transitions.