Lexical processing deficits in children with developmental language disorder (DLD) have been postulated to arise as sequelae of their grammatical deficits (either directly or via compensatory mechanisms) and vice versa. We examined event-related potential indices of lexical processing in children with DLD (n = 23) and their typically developing peers (n = 16) using a picture–word matching paradigm. We found that children with DLD showed markedly reduced N400 amplitudes in response both to auditorily presented words that had initial phonological overlap with the name of the pictured object and to words that were not semantically or phonologically related to the pictured object. Moreover, this reduction was related to behavioral indices of phonological and lexical but not grammatical development. We also found that children with DLD showed a depressed phonological mapping negativity component in the early time window, suggesting deficits in phonological processing or early lexical access. The results are partially consistent with the overactivation account of lexical processing deficits in DLD and point to the relative functional independence of lexical/phonological and grammatical deficits in DLD, supporting a multidimensional view of the disorder. The results also, although indirectly, support the neuroplasticity account of DLD, according to which language impairment affects brain development and shapes the specific patterns of brain responses to language stimuli.