This article refers to the results of a prospective effect evaluation study of three psychodynamic milieu-therapeutic institutions for children, which included cognitive and projective testing. After introducing milieu-therapy and explaining its roots in psychoanalytic and developmental thinking, the specific results of the research evaluation are outlined. It is found that environmental therapy is very efficient on the level of ego-functioning, but concern is expressed in regards to the relational abilities of the children. These findings are discussed in relation to the practical, organisational and theoretical principles of the actual treatment in order to find ways to improve our understanding of how milieu-therapy works and how it can be improved. Finally, we discuss the ways in which recent theoretical and empiric research emphasising the importance of the affect regulation and mentalisation can contribute to the psychoanalytic theories in the milieu-therapy.