As the literature on co-occurring substance abuse in persons with severe mental illnesses has evolved, emphasis on biologic and pharmacologic factors has diverted attention from important psychosocial issues. The authors review recent research showing that a) psychosocial risk factors may explain consistently high rates of substance abuse by these persons, b) substance abuse is for most clients a socio-environmental phenomenon embedded in interpersonal activities, and c) both natural recovery processes and effective treatments rely on developing new relationships, activities, coping strategies, and identities. Thus, psychosocial issues are critical in our attempts to understand and address substance abuse in this population.