This study investigated the role of peer rejection and best friend's externalizing behavior in the development of externalizing behavior in 740 children followed annually from kindergarten (mean age=6.2, SD=0.46) to 3rd grade. Consistently across time, children's externalizing problems predicted peer rejection. Peer rejection, in turn, added to the prediction of externalizing problems above and beyond prior levels of problem behavior. Having a best friend with externalizing problems did not add to the prediction of children's externalizing problems. All findings were similar for boys and girls. These results suggest that in early elementary school peer rejection, but not yet best friend's behavioral characteristics, has an additive effect on children's externalizing problem development.