In most children with asthma and atopy, onset of disease occurs early in life, indicating a crucial role of in utero and early childhood environment. However, only a small part of this burden of disease established early in life has been explained. To examine the effects of early environmental exposures on the development of asthma and atopy within the setting of an affluent urban population. The authors followed 526 German children from birth to 5 years of age. Parental interviews in pregnancy and then yearly assessed the health of the child and environmental characteristics. Endotoxin and allergens in house dust were measured at 3 months. Atopic sensitization was assessed at 1 and 5 years. In atopic mothers, acute atopic symptoms during pregnancy were associated with increased risk of early atopic dermatitis (adjusted odds ratio aOR 1.74, 95% confidence interval CI 1.00-3.02) and allergic rhinitis at 5 years (aOR 2.11, 95% CI 1.01-4.41). Further, maternal illnesses during pregnancy (ie, repeated common colds) increased the risk of asthma at 5 years (aOR 2.31, 95% CI 1.12-4.78). Endotoxin in the child's mattress was inversely associated with atopic sensitization (aOR 0.79, 95% CI 0.64-0.97) and asthma (aOR 0.71, 95% CI 0.55-0.93). A contrasting effect of early endotoxin and mite exposure was observed for mite sensitization: mite exposure increased the risk of mite sensitization at 5 years (aOR 1.30, 95% CI 1.11-1.53), whereas endotoxin exposure was inversely associated with mite sensitization (aOR 0.73, 95% CI 0.57-0.95). Factors affecting the in utero environment, such as maternal atopy and infections, and bacterial exposure in pregnancy or early life may act as immunomodulators enhancing or inhibiting the development of asthma and atopy in childhood.