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In a 3-year longitudinal study, middle- to upper-middle-class preschool children at high family risk (HR group, N= 67) and low family risk (LR group, N= 57) for dyslexia (or reading disability, RD), were evaluated yearly from before kindergarten to the end of second grade. Both phonological processing and literacy skills were tested at each of four time points. Consistent with the well-known familiarity of RD, 34% of the HR group compared with 6% of the LR group became RD. Participants who became RD showed deficits in both implicit and explicit phonological processing skills at all four time points, clearly indicating a broader phonological deficit than is often found at older ages. The predictors of literacy skill did not vary by risk group. Both risk groups underwent a similar developmental shift from letter-name knowledge to phoneme awareness as the main predictor of later literacy skill. This shift, however, occurred 2 years later in the HR group. Familial risk was continuous rather than discrete because HR children who did not become RD performed worse than LR non-RD children on some phonological and literacy measures. Finally, later RD could be predicted with moderate accuracy at age 5 years, with the strongest predictor being letter-name knowledge.