Signs of sensory and perceptual awareness can be observed in people with very severe dementia, and may be influenced by the extent to which the environment offers appropriate stimulation. We developed an observational tool, AwareCare, which care staff can use to identify signs of awareness in residents with very severe dementia, based on the concept of the Wessex Head Injury Matrix (WHIM). Using WHIM items as a guide, and following focus groups with care staff and family members, an expert panel identified 28 environmental stimuli and 35 response categories for the initial version of AwareCare. After baseline assessments of cognition, well-being and quality of life were taken, 40 residents were observed individually for 30 minutes on 5 occasions. Based on the observational data, 10 stimulus categories and 14 response categories were identified for further analysis and formed the final version of AwareCare. All participants showed awareness to varying degrees. Social stimuli elicited the most responses. Greater awareness was associated with better cognitive function, self-care, mobility, and responsiveness, but not with proxy-rated quality of life. Understanding the nature of awareness in this group is an important element in ensuring appropriate levels of interaction and stimulation, and hence enhancing quality of care.