© The Author (2016). Friendships play a major role in cognitive, emotional and social development in middle childhood. We employed the online Cyberball social exclusion paradigm to understand the neural correlates of dyadic social exclusion among best friends assessed simultaneously. Each child played with their friend and an unfamiliar player. Event-related potentials (ERPs) were assessed via electroencephalogram during exclusion by friend and unfamiliar peer. Data were analyzed with hierarchical linear modeling to account for nesting of children within friendship dyads. Results showed that stranger rejection was associated with larger P2 and positive slow wave ERP responses compared to exclusion by a friend. Psychological distress differentially moderated the effects of friend and stranger exclusion such that children with greater psychological distress were observed to have larger neural responses (larger P2 and slow wave) to exclusion by a stranger compared to exclusion by a friend. Conversely, children with lower levels of psychological distress had larger neural responses for exclusion by a friend than by a stranger. Psychological distress within the dyad differentially predicted the P2 and slow wave response. Findings highlight the prominent, but differential role of individual and dyadic psychological distress levels in moderating responses to social exclusion in middle childhood.