This study sought to explore the possible relationship between parental style of psychological defense and children's social competence in 50 families in which one parent had been hospitalized for a psychiatric disorder. The children sampled were nine 4-year-olds, eleven 7-year-olds and thirty 10-year-olds. Based upon a formal analysis of the logical transformations inherent in various defense mechanisms, three levels of complexity of defenses were identified, along with a counterpart set of cognitive operations necessary for decoding these defense levels. It was hypothesized that children lacking the requisite cognitive skills to grasp the logical complexities of their disturbed parent's primary mode of psychological defense would be less socially adjusted and judged less competent than children who can understand the defensive transformations of their parent. The results indicated that children who, due to their cognitive immaturity, cannot decipher their parent's defensive strategies are rated by peers and fathers as less competent than children who can understand their parent's defenses. Furthermore, children with a parent who employs defense mechanisms slightly too complex for them to comprehend are significantly more socially incompetent than children whose cognitive structures are largely mismatched with or are far too immature to understand the complexity of their parent's defenses. Implications of these results for psychotherapeutic interventions with children and families are discussed. (Author/BH)