Four lines of evidence suggest a plausible link between prenatal cocaine exposure (CE) and specific effects on the mechanisms subserving arousal and attention regulation in infants and preschool-aged children. These are (1) the association of prenatal CE with alterations in monoaminergic system ontogeny; (2) neurobehavioral effects of prenatal CE in animals consistent with an enduring increased level of activity in response to novelty and inhibited exploration and altered responses to stress, suggesting overarousal in the face of novel/stressful situations and disrupted attention and exploration; (3) altered norepinephrine system function in cocaine-exposed human infants; and (4) neurobehavioral findings in infants and preschool-aged children suggestive of disrupted arousal regulation in the face of novelty, increased distractibility, and consequent impaired attention to novel, structured tasks. This paper summarizes findings on response to novel challenges from a cohort of prenatally cocaine-exposed infants and preschool-aged children followed longitudinally since birth. Arousal regulation in the face of novel challenges is operationalized behaviorally as state and emotional reactivity and neurophysiologically as the startle response and heart rate variability. Across different ages and tasks, behavioral and neurophysiological findings suggest that prenatally cocaine-exposed children are more likely to exhibit disrupted arousal regulation. Because the regulation of arousal serves as a gating mechanism to optimize orientation and attention, arousal regulation has important implications for ongoing information processing, learning, and memory. Furthermore, impaired arousal regulation predisposes children to a lower threshold for activation of "stress circuits" and may increase their vulnerability to the developmentally detrimental effects of stressful conditions particularly when such children are also exposed to the chaotic environmental conditions often characterizing substance-abusing families.