This article reports the findings of a prospective study of two residential units for elderly people with dementia: a community hospital ward (unit 1) providing an enhanced version of traditional hospital care and a scheme developed in partnership with a charity (unit 2) operating an explicit policy emphasizing resident choice, opportunity, support and independence. Residents, staff and unit policy were assessed at baseline in long-stay mental hospital wards, and at 6 months and 12 months after relocation. The Quality of Interactions Schedule (QUIS) was carried out on one occasion on a comparison long-stay mental hospital ward, at 12 and 24 months in unit 1 and at 6 and 12 months in unit 2. At 12 months, there was an increase in the quality but not the number of staff- resident interactions observed in unit 1, compared to the long-stay ward: both number and quality had improved on this unit at 24 months. Much larger increases in number and quality of interactions were observed in unit 2 at both 6 and 12 months. These changes were associated in unit 2 but not unit 1 with a decrease in observed depression, no decline in self-care (ADL) and improvement in communication skills over the follow-up period. There was a significant excess mortality in the unit 2 cohort at 6 months, but there was no difference at 12 months. At 12 months, staff on both units reported good levels of job satisfaction and morale.