In this longitudinal study we analyse the early phases of reading development in Italian and explore the transition from phonological to lexical reading. A group of 28 Italian children was tested in four phases. Language and cognitive skills were first assessed in the preschool. Reading performance was then tested in three different sessions, in grade 1 and 2, using off-line naming tasks. To identify lexical reading we included in our test Italian words that have atypical stress assignment and can be pronounced with fluent prosody only by using lexical look up. Our findings show that phonological reading develops from aloud conversion of small orthographic units (e.g., single graphemes) to aloud conversion of whole strings. Such development underlies a systematic expansion of lexical reading. Children who deployed lexical reading for a low percentage of words at the end of grade 2 were likely to rely on grapheme by grapheme conversion still at the end of grade 1. Phonological, lexical, visual attention, and orthographic memory skills contribute to the systematic development of lexical reading. (Contains 2 footnotes, 4 tables, and 4 figures.)