Developmental dyslexia is associated with deficits in the processing of basic auditory stimuli. Yet it is unclear how these sensory impairments might contribute to poor reading skills. This study better characterizes the relationship between phonological decoding skills, the lack of which is generally accepted to comprise the core deficit in reading disabilities, and auditory sensitivity to amplitude modulation (AM) and frequency modulation (FM). Thirty-eight adult subjects, 17 of whom had a history of developmental dyslexia, completed a battery of psychophysical measures of sensitivity to FM and AM at different modulation rates, along with a measure of pseudoword reading accuracy and standardized assessments of literacy and cognitive skills. The subjects with a history of dyslexia were significantly less sensitive than controls to 2-Hz FM and 20-Hz AM only. The absence of a significant group difference for 2-Hz AM shows that the dyslexics do not have a general deficit in detecting all slow modulations. Thresholds for detecting 2-Hz and 240-Hz FM and 20-Hz AM correlated significantly with pseudoword reading accuracy. After accounting for various cognitive skills, however, multiple regression analyses showed that detection thresholds for both 2-Hz FM and 20-Hz AM were significant and independent predictors of pseudoword reading ability in the entire sample. Thresholds for 2-Hz AM and 240-Hz FM did not explain significant additional variance in pseudoword reading skill. It is therefore possible that certain components of auditory processing of modulations are related to phonological decoding skills, whereas others are not.