Using a speeded lexical decision task, event-related potentials (ERPs), and minimum norm current source estimates, we investigated early spatiotemporal aspects of cortical activation elicited by words and pseudowords that varied in their orthographic typicality, that is, in the frequency of their component letter pairs (bigrams) and triplets (trigrams). At around 100 msec after stimulus onset, the ERP pattern revealed a significant typicality effect, where words and pseudowords with atypical orthography (e.g., yacht, cacht) elicited stronger brain activation than items characterized by typical spelling patterns (cart, yart). At ~200 msec, the ERP pattern revealed a significant lexicality effect, with pseudowords eliciting stronger brain activity than words. The two main factors interacted significantly at around 160 msec, where words showed a typicality effect but pseudowords did not. The principal cortical sources of the effects of both typicality and lexicality were localized in the inferior temporal cortex. Around 160 msec, atypical words elicited the stronger source currents in the left anterior inferior temporal cortex, whereas the left perisylvian cortex was the site of greater activation to typical words. Our data support distinct but interactive processing stages in word recognition, with surface features of the stimulus being processed before the word as a meaningful lexical entry. The interaction of typicality and lexicality can be explained by integration of information from the early form-based system and lexicosemantic processes.