A longitudinal study investigated the claim that phonological memory contributes to vocabulary acquisition in young children. In the first phase, children were given tests of receptive vocabulary, receptive grammar, nonword repetition, phonological sensitivity (or “awareness”), and performance IQ. In the second phase, children were given the nonword repetition and receptive vocabulary tests. In Session 1, both nonword repetition and phonological sensitivity accounted for variation in receptive vocabulary and grammar after performance IQ effects were controlled. When phonological sensitivity was also controlled, nonword repetition did not account for significant additional variation in receptive vocabulary and grammar. When performance IQ and autoregression effects were controlled, all Session 1 verbal ability measures predicted Session 2 vocabulary, but only Session 1 vocabulary predicted Session 2 nonword repetition. When phonological sensitivity was also controlled, Session 1 nonword repetition (leniently scored) predicted Session 2 vocabulary. Overall, these findings show qualified support for the claim that the capacity component of nonword repetition contributes directly to vocabulary in young children. They suggest that the association between nonword repetition and vocabulary in young children may, to a substantial extent, reflect a latent phonological processing ability that is also manifest in phonological sensitivity.