This prospective, longitudinal study examines individual differences in two conceptually related but empirically distinct domains of social-cognitive competence (cognitive interpretive understanding and interpersonal perspective co-ordination) as moderators of the relation between peer rejection and neglect and behavioral and emotional problems in grades 2 and 3. As expected, peer rejection and neglect increased risks for behavioral and emotional problems whereas interpretive understanding (understanding of mental states) and perspective co-ordination (awareness of others' emotions and motives) reduced risks for aggressive, disruptive, inattentive, and anxious, sad, withdrawn behaviors. Assumptions that awareness of others' perspectives bestows consistent benefits for children experiencing peer problems were challenged. Unexpectedly, rejection and neglect increased risks for behavioral and emotional problems for children who demonstrated average and high levels of perspective co-ordination. More advanced perspective co-ordination may heighten children's sensitivity to peer relationship problems and result in general maladjustment, both concurrently and over time. Less advanced perspective co-ordination may also be responsible for the ‘optimistic bias’ that has been noted in aggressive children.