A comparative study examined mental development and possible mechanisms of impairment in 106 children aged 3–7 living in residential care and 60 children of the same age living with their families and attending preschool. Children in both groups had a history of perinatal central nervous system injury. Mental development and neuroendocrine regulation were assessed using clinical and biochemical methods and compared between groups. Children in residential care more frequently showed combined developmental delay, low intellectual development, high neuroticism and a diminished emotional state. The number with developmental difficulties increased with age. Their blood concentrations of triiodothyronine, thyroid-stimulating hormone, growth hormone and cortisol were lower than those of children living with families. The authors interpret these findings as evidence of the adverse effects of emotional deprivation and the need for new approaches to preventing and correcting mental health difficulties in these children.