The present study compared the early Hebrew (L2) literacy development of three groups; two groups of bilinguals — bi-literate and mono-literate Russian-Hebrew speakers, and a third group of monolingual Hebrew-speakers. It predicted that bi-literacy rather than bilingualism is the key variable as regards L2 literacy learning. In a longitudinal design, a variety of linguistic, meta-linguistic and cognitive tasks were administered at the commencement of first grade, with Hebrew reading and spelling assessed at the end of the year. Results demonstrated that bi-literate bilinguals were far in advance of both mono-literate (Russian-Hebrew) bilinguals and mono-lingual Hebrew-speakers on all reading fluency measures at the end of Grade 1. Bi-literate bilinguals also showed a clear advantage over mono-literate bilingual and mono-lingual peers on all phonological awareness tasks. The mono-literate bilinguals also demonstrated some modest gains over their monolingual peers in Grade 1 reading accuracy. All three groups performed similarly on L2 linguistic tasks. These findings confirm Bialystok’s (2002) assertion that bilingualism per se may not be the most influential factor in L2 reading acquisition. Early (L1) literacy acquisition, however, can greatly enhance L2 literacy development. The present findings also suggest that the actual mechanism of cross-linguistic transfer is the insight gained into the alphabetic principle common to all alphabetic writing systems and not merely the knowledge of a specific letter-sound code such as the Roman orthography.