A brief literature review found that census-based indicators combined with self-reported experiential factors can be informative regarding the development of delinquency and drug use; however, researchers are becoming increasingly aware that certain individual-level factors may interact with environmental factors to promote drug use. The current study addressed this issue by collecting data as part of a short longitudinal study of psychosocial functioning and drug use in a cohort of urban, ethnic minority youths from neighborhoods with low socioeconomic status. Only data from African-American and Hispanic youths were included in the study, producing a final baseline sample size of 1,138 students with an average age of 13 years; 51 percent of the sample was female. Measures of perceived neighborhood risk assessed gang activity, fighting, and neighborhood toughness. Measures of psychosocial functioning addressed intrapersonal and interpersonal skills implicated as correlates and predictors of early-stage drug use. Perceptions of neighborhood risk uniquely predicted alcohol, cigarette, and marijuana use; however, some relationships were qualified by level of psychosocial functioning. Negative affect, peer relations, and social concern moderated the effects of neighborhood risk on alcohol use. Negative affect moderated the relationships between neighborhood risk and cigarette use. Risk-taking and family relationships moderated the relationships between neighborhood risk and marijuana use. Overall, the size of these effects was small, underscoring the need to include a wider range of conceptually relevant measures. Longitudinally, neighborhood risk was uniquely associated with less protection and greater polydrug use, controlling for early levels of psychosocial risk and protection. Findings reveal the need to develop a more complete understanding of the precise manner in which environmental risk increases susceptibility to early-stage drug use. 3 tables, 3 figures, 5 notes, and 77 references