Previous work has demonstrated reliable electroencephalographic (EEG) sleep and hypothalamic-pituitary-adrenal (HPA) changes associated with adult major depressive disorder. These changes might be evident before clinical manifestation of the illness in at-risk persons. The aim of the study was to identify depression-related EEG sleep and HPA changes in healthy adolescents at high risk for depression, and to examine the relationship between EEG sleep (or HPA) changes and the onset of depression. Forty-eight adolescent volunteers with no personal history of a psychiatric illness, including depression, but who were at high risk for developing depression by virtue of parental depression (high-risk group), and 48 adolescent volunteers with no personal or family history of a psychiatric disorder (normal controls) were recruited. EEG sleep and HPA measures were collected on three consecutive evenings and nights at baseline. Clinical follow-up evaluations were conducted at regular intervals over a 5-year period. Compared with normal controls, adolescents at high risk for depression had shorter latency to rapid eye movement (REM) sleep, increased phasic REM sleep, more REM sleep and elevated nocturnal urinary-free cortisol (NUFC) excretion at baseline. Shorter REM latency, higher REM density and elevated NUFC (measured at baseline) were associated with the development of depression during follow-up. The findings that REM sleep abnormalities and elevated HPA activity occur before the onset of depression in at-risk adolescents suggest that these variables serve as vulnerability markers for the illness.