Whilst there is general consensus that phonological processing is deficient in developmental dyslexia, recent research also implicates visuo-attentional contributions. Capitalising on the P3a wave of event-related potentials as an index of attentional capture, we tested dyslexic and normal readers on a novel variant of a visual oddball task to examine the interplay of orthographic-phonological integration and attentional engagement. Targets were animal words (10% occurrence). Amongst nontarget stimuli were two critical conditions: pseudohomophones of targets (10%) and control pseudohomophones (of fillers; 10%). Pseudohomophones of targets (but not control pseudohomophones) elicited a large P3 wave in normal readers only, revealing a lack of attentional engagement with these phonologically salient stimuli in dyslexic participants. Critically, both groups showed similar early phonological discrimination as indexed by posterior P2 modulations. Furthermore, phonological engagement, as indexed by P3a differences between pseudohomophone conditions, correlated with several measures of reading. Meanwhile, an analogous experiment using coloured shapes instead of orthographic stimuli failed to show group differences between experimental modulations in the P2 or P3 ranges. Overall, our results show that, whilst automatic aspects of phonological processing appear intact in developmental dyslexia, the breakdown in pseudoword reading occurs at a later stage, when attention is oriented to orthographic-phonological information. (Contains 3 tables and 4 figures.)