Children of depressed mothers are at risk for behavioral and emotional problems. Infants of depressed mothers exhibit behavioral disturbances and atypical frontal brain activity. The mechanisms by which children develop such vulnerabilities are not clear. Three-year-old children of mothers with (N = 65) and without (N = 59) a history of depression were assessed in terms of behavior problems and brain electrical activity. Children of mothers with chronic depression exhibited lower frontal and parietal brain activation compared with children of mothers without depression and those whose depression remitted. Depressed mothers reported higher contextual risk (e.g., marital discord and stress) and their children had more behavior problems. Children's frontal brain activation and contextual risk level mediated the relation between maternal depression and child behavior problems.