Ample evidence suggests that developmental dyslexia results from a phonological deficit that may not be reducible to a low-level auditory deficit. Yet, on-line phonological processing (in)capacities in dyslexics remain virtually unexplored, as studies have typically focused on either meta-phonological awareness tasks or, at the other extreme, basic perceptual tasks. The present study investigates event-related potential (ERP) correlates of implicit phonological processing during the recognition of spoken words in dyslexic and normally reading children (7-10 years). We examined general ERP morphology and alliteration priming effects on ERP measures in an auditory lexical decision task. Primes were words (Experiment 1) and non-words (Experiment 2). Alliteration priming effects suggested a distinct pattern of normal versus anomalous aspects of spoken word processing in dyslexic children. Whereas dyslexics showed deviant priming effects in earlier time windows encompassing the N1 and N2, later N400 priming effects were comparable to those of normal readers. The same pattern of results was also present in group comparisons of general ERP morphology. These findings suggest that dyslexics have selective processing anomalies at an earlier phonetic/phonological level, while processing at a later phonological/lexical level proceeds normally. In particular, our results indicate an anomalous contribution of phonological (word onset) information to the processing of spoken words, which may be related to time-course aspects of phonetic/phonological processing.