Phonological difficulties characterize children with developmental dyslexia across languages, but whether impaired auditory processing underlies these phonological difficulties is debated. Here the causal question is addressed by exploring whether individual differences in sensory processing predict the development of phonological awareness in 86 English-speaking lower- and middle-class children aged 8 years in 2005 who had dyslexia, or were age-matched typically developing children, some with exceptional reading/high IQ. The predictive relations between auditory processing and phonological development are robust for this sample even when phonological awareness at Time 1 (the autoregressor) is controlled. High reading/IQ does not much impact these relations. The data suggest that basic sensory abilities are significant longitudinal predictors of growth in phonological awareness in children.