Children raised in institutional settings experience marked deprivation in social and environmental stimulation. This deprivation may disrupt brain development in ways that increase risk for psychopathology. Differential hemispheric activation of the frontal cortex is an established biological substrate of affective style that is associated with internalizing psychopathology. Previous research has never characterized the development of frontal electroencephalogram asymmetry in children or evaluated whether adverse rearing environments alter developmental trajectories. A sample of 136 children (mean age = 23 months) residing in institutions in Bucharest, Romania, and a sample of community control subjects (n = 72) participated. Half of institutionalized children were randomized to a foster care intervention. Electroencephalogram data were acquired at study entry and at ages 30, 42, and 96 months. A structured diagnostic interview of psychiatric disorders was completed at 54 months. Children exhibited increases in right relative to left hemisphere frontal activation between the second and fourth years of life, followed by an increase in left relative to right hemisphere activation. Children reared in institutions experienced a prolonged period of increased right hemisphere activation and a blunted rebound in left frontal activation. Foster care placement was associated with improved developmental trajectories but only among children placed before 24 months. The development trajectory of frontal electroencephalogram asymmetry in early childhood predicted internalizing symptoms at 54 months. Exposure to adverse rearing environments can alter brain development, culminating in heightened risk for psychopathology. Interventions delivered early in life have the greatest potential to mitigate the long-term effects of these environments.