Given that children have a strong bias towards their in-group, this study examined how children respond to a group member who is revealed to have negative qualities. One hundred and twenty Anglo-Australian children who were 6, 9, or 12 years of age heard a story about an (in-group) Anglo-Australian boy and a (out-group) Chinese boy who were good friends or bad enemies. In addition, the story characters displayed both positive and negative traits, and both enacted a positive and a negative behaviour. The results revealed that, as they increased in age, the children remembered more of the in-group character's negative versus positive traits, saw themselves as increasingly dissimilar to him, and they liked him less, whereas they remembered more of the out-group character's positive versus negative traits, saw themselves as increasingly similar to him, and liked him more. Contrary to expectations, the story characters' relationship did not systematically impact on the children's responses. The results are discussed in terms of the extent of support provided for social identity development theory. (Contains 4 figures.)