It can be really hard for adults who have been bullied either when they were children or as an adult to deal with kids who intimidate and bully. Remember that you are an adult, so you have the real power here. I hope that this child can learn better ways of interacting with people, although I know it isn't your responsibility to teach him. Maybe you can set an example though. If you don't, then who will? Kids who act like that have learned it somewhere, and inside they feel vulnerable and feel a need to act tough and make other people feel vulnerable in order to make themselves feel better.

Here are some tips for dealing with bully behavior, both for the bully and for the victim. I'll let you sort out what might help you, and maybe if you could pass any of it along to the neighbor boy and/or his parents. One of my favorite statements is the quote about the best way to destroy an enemy is to make him your friend. There's a lot more too if you want to look through it.

http://www.angriesout.com/bullyb.htm

Rap