Auditory sensory modulation difficulties and problems with automatic re-orienting to sound are well documented in autism spectrum disorders (ASD). Abnormal preattentive arousal processes may contribute to these deficits. In this study, we investigated components of the cortical auditory evoked potential (CAEP) reflecting preattentive arousal in children with ASD and typically developing (TD) children aged 3-8 years. Pairs of clicks ('S1' and 'S2') separated by a 1 sec S1-S2 interstimulus interval (ISI) and much longer (8-10 sec) S1-S1 ISIs were presented monaurally to either the left or right ear. In TD children, the P50, P100 and N1c CAEP components were strongly influenced by temporal novelty of clicks and were much greater in response to the S1 than the S2 click. Irrespective of the stimulation side, the 'tangential' P100 component was rightward lateralized in TD children, whereas the 'radial' N1c component had higher amplitude contralaterally to the stimulated ear. Compared to the TD children, children with ASD demonstrated 1) reduced amplitude of the P100 component under the condition of temporal novelty (S1) and 2) an attenuated P100 repetition suppression effect. The abnormalities were lateralized and depended on the presentation side. They were evident in the case of the left but not the right ear stimulation. The P100 abnormalities in ASD correlated with the degree of developmental delay and with the severity of auditory sensory modulation difficulties observed in early life. The results suggest that some rightward-lateralized brain networks that are crucially important for arousal and attention re-orienting are compromised in children with ASD and that this deficit contributes to sensory modulation difficulties and possibly even other behavioral deficits in ASD.