BACKGROUND: Older adults who receive training for functional skills in contextually appropriate environments may show greater functional improvement than persons trained in a traditional environment. Functionally limited older adults receiving training in contextually appropriate environments (simulated home and community settings) may show greater improvement in activities of daily living (ADL) than persons trained in a traditional manner. METHODS: Eighty-eight patients from a day hospital, aged 65 years or older, were randomized to either receive rehabilitation in a simulated environment (Easy Street) or in a gymnasium setting. Rehabilitation focused on retraining functional skills in a contextually appropriate environment (Easy Street) or in a traditional setting (gymnasium) using motor learning principles for a period of 16 weeks. Outcome measures included the Structured Assessment of Instrumental Living Skills (SAILS), a performance measure with criterion and timed components; a self-report health status questionnaire, the Short Form-36 (SF-36); and the patient-orientated goal-directed Canadian Occupational Performance Measure (COPM). RESULTS: There were no group differences on any of the outcome measures: SAILS (p = .3); the SF-36 physical (p = .83) and mental (p = .51); and the COPM performance scale (p = .94) and satisfaction scale (p = .40). CONCLUSIONS: Although we have not excluded benefits of contextually appropriate rehabilitation environments with different intervention approaches, at different stages of rehabilitation or with patients at higher functional levels, our results suggest the appropriateness of a moratorium on these expensive interventions pending demonstration of clear positive effects determined from further study.