Investigating how good and poor readers process words, a study examined the spelling and reading processes of 80 middle-class first grade students from three schools in Houston, Texas, 40 who were receiving whole word instruction, and 40 receiving phonics instruction. Based on scores from the Gates-McGinitie Reading Test, Basic R (administered in October of the first grade year), subjects whose grade equivalency scores were greater than 1.3 were categorized as good readers, and those with scores equal to or less than 1.3 were categorized as poor readers. To determine whether words were processed visually or phonologically, students were given 60 single-syllable words--consisting of regular words, whose spelling conformed to grapheme-phoneme correspondence (GPC), and exception words, whose spelling did not conform to GPC--to read orally, spell, and recognize in lists of other words. After a week-long spelling test covering the words, students were administered the Peabody Picture Vocabulary Test, an oral reading test of the 60 words, a recognition reading test of the 60 words (with and without a clue condition), and Rosner's Test of Auditory Analysis Skills (TAAS). Results indicated that both good and of poor readers processed words differently depending on the nature of the task. Good readers were superior in phonological recoding and application of GPC rules and were weaker in utilization of visual-orthographic knowledge. Mid-year data collected in February and end-of-the-year data collected in May will also be analyzed. (Two tables of data are included.) (MM)