Objective: We investigated event-related potential (ERP) correlates of developmental changes in spoken word recognition during early school years. We focused on implicit processing of word onsets as this may change considerably due to vocabulary growth and reading acquisition. Methods: Subjects were pre-schoolers (5-6 years), beginning readers (7-8 years) and adults. Two experiments examined phonological onset priming effects on ERP measures in an auditory lexical decision task. Primes were words (Expt. 1) or non-words (Expt. 2). Results: ERPs elicited by words showed clear developmental changes in ERP latency and morphology, especially with regard to early negativities like the N1. Prominent priming effects were an enhanced N400 amplitude due to alliterating word primes in beginning readers, and typical phonological N400 reductions due to alliterating non-word primes in all groups. Priming further led to opposite early effects with word primes (N1/N-200 reduction) vs. non-word primes (P1/N1 enhancement) in all groups. Conclusions: These changes in ERP morphology and priming effects suggest that the lexical system undergoes substantial restructuring at the level of phonological processing and representation. In particular, our results indicate distinct processing of word onsets in beginning readers, confirming that vocabulary growth and the acquisition of reading may critically contribute to the formation of a fully segmental lexical system.