While awareness among people with mild to moderate dementia residing in the community has been extensively studied, little evidence has been presented regarding the extent to which people with moderate to severe dementia living in residential care show awareness of their own situation and functioning. The present study aimed to explore how differing degrees of awareness are manifested in the conversations and interactions of people with dementia living in residential care settings, and to identify theoretical and practical implications. Transcripts of 304 conversations with 80 individuals with dementia living in residential care homes in England and Wales were analysed using a grounded theory approach. All 80 participants demonstrated a degree of retained awareness, and there was considerable evidence of retained awareness throughout the conversations, expressed in relation to the three domains of self, relationship, and the environmental context. Two-thirds of participants also demonstrated at least one instance of unawareness, although demonstrations of retained awareness outweighed indications of unawareness. Unawareness was evident in relation to appraisal of functioning and the meaning ascribed to the situation. A grounded theory model of awareness in people with moderate to severe dementia who still communicate verbally proposes that demonstration of awareness involves a set of analytic and behavioural processes, a scope or timescale, and a focus. Awareness is demonstrated in relation to a given focus and scope through the involvement of cognitive processes of varying degrees of complexity, ranging from registering through appraising and interpreting to reflection. Unawareness may be demonstrated in relation to some elements of process, focus or scope, while other aspects remain unaffected. Understanding more about the capacity for retained awareness and the specific ways in which awareness can be compromised may assist care staff in responding effectively to residents' needs.