Twenty years after research on children's ‘theory of mind’ began, this field continues to be a leading influence in the study of developmental psychology and psychopathology. In this review we examine the contribution of research on children's theories of mind to our understanding of children's developing social relationships. Evidence shows that for both typical and atypical populations this relationship is neither uniform nor unidirectional. Theory-of-mind skills are multifaceted and the nature of the developmental relationship between different aspects is not yet known, and there is evidence that theory-of-mind skills both transform and are transformed by interpersonal and family relationships and by language communities. To understand the multifaceted and complex nature of development in this area, we need clearer definitions of the skills under investigation, as well as research designs that capture the transactional nature of the relationship between theory of mind and social relations. Addressing these issues should help to clarify (i) the processes by which children's developing understanding of others is influenced by the social environment, and (ii) issues concerning the specificity of theory-of-mind impairments in atypical populations and the processes by which these impairments develop.