Individuals with developmental dyslexia (DD) show a disruption in posterior left-hemispheric neural networks during phonological processing. Additionally, compensatory mechanisms in children and adults with DD have been located within frontal brain areas. However, it remains unclear when and how differences in posterior left-hemispheric networks manifest and whether compensatory mechanisms have already started to develop in the prereading brain. Here we investigate functional networks during phonological processing in 36 prereading children with a familial risk for DD (n = 18, average age = 66.50 mo) compared with age and IQ-matched controls (n = 18; average age = 65.61 mo). Functional neuroimaging results reveal reduced activation in prereading children with a family-history of DD (FHD(+)), compared with those without (FHD(-)), in bilateral occipitotemporal and left temporoparietal brain regions. This finding corresponds to previously identified hypoactivations in left hemispheric posterior brain regions for school-aged children and adults with a diagnosis of DD. Furthermore, left occipitotemporal and temporoparietal brain activity correlates positively with prereading skills in both groups. Our results suggest that differences in neural correlates of phonological processing in individuals with DD are not a result of reading failure, but are present before literacy acquisition starts. Additionally, no hyperactivation in frontal brain regions was observed, suggesting that compensatory mechanisms for reading failure are not yet present. Future longitudinal studies are needed to determine whether the identified differences may serve as neural premarkers for the early identification of children at risk for DD.