We review current theoretical ideas on pulsar winds and their surrounding nebulae. Relativistic MHD models of the wind of the aligned rotator, and of the striped wind, together with models of magnetic dissipation are discussed. It is shown that the observational signature of this dissipation is likely to be point-like, rather than extended, and that pulsed emission may be produced. The possible pulse shapes and polarisation properties are described. Particle acceleration at the termination shock of the wind is discussed, and it is argued that two distinct mechanisms must be operating, with the first-order Fermi mechanism producing the high-energy electrons (above 1 TeV) and either magnetic annihilation or resonant absorption of ion cyclotron waves responsible for the 100 MeV to 1 TeV electrons. Finally, MHD models of the morphology of the nebula are discussed and compared with observation.
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