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Columnar lined oesophagus (Barrett's oesophagus) carries a risk for the development of adenocarcinoma. Epithelial dysplasia appears to be a precursor but the utility of this marker for predicting subsequent adenocarcinoma is unsettled. We therefore prospectively studied 81 patients with histologically proven columnar epithelium of at least the distal 3 cm of the tubular oesophagus with regular endoscopic biopsies for a total of 289.2 patient years (mean 3.6 years, range 0.5-8). Twenty three patients (28%) had epithelial dysplasia detected during follow up. Both patients with persistent high grade dysplasia present on initial biopsies developed adenocarcinoma after 2.6-4.5 years, despite the absence of gross macroscopic change. The initial single layer pleomorphic high grade dysplasia in one patient regressed to low grade dysplasia which has persisted for 1.5 years. Of 10 patients with initial low grade dysplasia, one progressed to adenocarcinoma in 4.3 years. The low grade dysplasia persisted unchanged in seven patients for 1.5-7 years and appears to have regressed in two patients after three to five years. Ten patients developed low grade dysplasia during the surveillance period. This has persisted unchanged in six patients from 0.5-5 years, regressed in three for 0.5-5 years and has appeared after the first yearly biopsy in one patient. No patient without dysplasia has developed adenocarcinoma. The incidence of adenocarcinoma in Barrett's oesophagus in this study is one case per 96 patient years. This is 61 times (95% confidence limits 12-176) the age adjusted incidence of oesophageal cancer in Australia. Persistent high grade dysplasia appears to be a sensitive indicator for the development of subsequent adenocarcinoma.