Previous studies have shown that children suffering from developmental dyslexia have a deficit in categorical perception of speech sounds. The aim of the current study was to better understand the nature of this categorical perception deficit. In this study, categorical perception skills of children with dyslexia were compared with those of chronological age and reading level controls. Children identified and discriminated /do-to/ syllables along a voice onset time (VOT) continuum. Results showed that children with dyslexia discriminated among phonemically contrastive pairs less accurately than did chronological age and reading level controls and also showed higher sensitivity in the discrimination of allophonic contrasts. These results suggest that children with dyslexia perceive speech with allophonic units rather than phonemic units. The origin of allophonic perception in the course of perceptual development and its implication for reading acquisition are discussed.