This study sought to examine links among young children's peer relations, their moral understanding in terms of the ability to distinguish lies from mistakes, and their theory-of-mind development. Based on sociometric measures, 109 children with a mean age of 4.8 years were divided into groups of popular and rejected preschoolers. Rejected children who had a stable mutual friend scored higher on measures of moral understanding and theory of mind than did rejected children without such friendships. Similarly, popular children who had a stable mutual friendship outperformed other popular children on mindreading, although their moral understanding was no better than that of the popular group who lacked mutual friends. Hierarchical multiple regression analyses revealed that peer popularity was a significant independent predictor of children's moral understanding after any effects of verbal maturity, age and theory-of-mind were statistically controlled. Moreover, having a reciprocal stable friendship made a significant independent contribution to the explanation of individual differences in mindreading, over and above age and verbal maturity, which also contributed significantly. These results are discussed in terms of conversational, cognitive, and emotional processes in the development of social cognition.