Although one in four seniors currently lives in a rural area, little is known about the capacity of rural nursing homes to provide specialized dementia services. The physical and social environments are increasingly recognized as important factors in the quality of life and functional ability of persons with dementia. This study compared eight rural nursing homes (those located in centres with populations < or =15,000) that had created dementia Special Care Units (SCUs) to eight same-sized rural nursing homes that did not have SCUs. Outcomes were assessed in relation to residents, staff, family members, and the environment. In this paper we describe the overall study design and findings from the environmental assessment. Analysis of variance (ANOVA) was used to compare the SCU versus non-SCU environments on the nine dimensions of the Physical Environmental Assessment Protocol (PEAP), which was used to assess the physical environment. The SCUs were more supportive on six dimensions: maximizing awareness and orientation, maximizing safety and security, regulation of stimulation, quality of stimulation, opportunities for personal control, and continuity of the self. Analysis of variance was also used to compare the groups on the six subscales of the Nursing Unit Rating Scale (NURS), which assesses the social environment of dementia care settings. The SCUs were more supportive on the Separation and Stimulation subscales, indicating that SCUs had greater separation of residents with dementia from other residents for activities of daily living and programming, and better control of non-meaningful stimulation.