An observational study of classroom behavior was made to identify competencies and contexts of social interaction influencing the development of friendship among preschool children attending an integrated special education classroom. Subjects were six boys and four girls whose ages ranged from 3 to 6 years. Two of the children, a 4-year-old girl and a 5-year-old boy, were enrolled as normal peer models. The eight developmentally delayed children differed in the severity of their mental handicap. Data suggest that friendship between handicapped and nonhandicapped preschool children was an activity-related phenomenon in which the quality of children's relationships was more important than the quantity of interaction. Skills for maintaining social interaction were central to the success of the handicapped children's involvement in cooperative play activities and their subsequent social acceptance by normal peers. Findings also suggest that social relations between normal and handicapped children that originate from a positive base of parallel or adult-directed play are more likely to be sustained and may result in more complex interactions, than if cross-group friendships are initially tested through cooperative activity involvements. Implications for practice are extensively discussed. (RH)