We examined how toddlers process lexical ambiguity where different underlying forms are neutralized at the surface level. In a preferential-looking procedure, French-learning 30-month-olds were familiarized with either liaison-ambiguous phrases (i.e., sentences containing a determiner and a non-word, e.g., "ces /z/onches," "these onches", "these zonches") (Experiment 1), or non-ambiguous (non-liaison) phrases (sentences containing "un zonche," "a zonche") (Experiment 2). Infants in both experiments showed a vowel-initial interpretation for the non-word, i.e., perceiving /z/ as an independent unit. In Experiment 3, 36-month-olds accepted both vowel- and consonant-initial forms (e.g., "zonche, onche") after hearing the non-ambiguous cases ("un zonche"), suggesting an emerging but unstable understanding of the relationship between specific determiners and liaison consonants. Overall, infants represented the liaison consonant /z/ as an independent unit, consistent with the adult grammar. Furthermore, liaison knowledge biased infants' interpretation of liaison-ambiguous cases (same as in adults) and even non-liaison cases.