Recent work has demonstrated the importance of derivational morphology to later language development and has led to a consensus that derivation is a lexical process. In this review, derivational morphology is discussed in terms of lexical representation models from both linguistic and psycholinguistic perspectives. Input characteristics, including types of frequency (lexical, surface, affix, and relative) and transparency (semantic, phonological, and orthographic), are examined as key factors that affect processing and acquisition. We introduce the possibility that lexical prosody and syllabic characteristics are relevant to lexical representation and affix separability, and we propose that derivational morphemes can emerge to different degrees in a system that is sensitive to both sound and meaning. Finally, morphological development with a focus on children's sensitivity to input characteristics is briefly reviewed, and we conclude with a perspective of how lexical representation can be a framework for derived word study in therapeutic or educational settings.