The aim of the current research was to test the hypothesis that the activation of embedded words (e.g., the farm in farmhouse) is the starting point for the development of an abstract morphological parsing system in children's reading. To test this hypothesis, we examined the developmental trajectory of compound priming effects in third-and fifth-grade primary school children, high school students, and adults. Both children and adults participated in a masked priming lexical decision study comparing transparent compound (farmhouse-farm), opaque compound (butterfly-butter), and noncompound (sandwich-sand) word priming effects measured relative to an unrelated control. The results showed significant and equal priming effects in the two compound conditions but not in the noncompound priming condition. This robust pattern was clearly and unequivocally observed across all groups of participants. Our data suggest that even the youngest readers have already acquired the ability to rapidly and automatically identify embedded stems and are sensitive to the overall structure of compound words (full decomposition). We conclude that the activation of embedded stems provides a critical starting point in children's use of morphological information when learning to read.