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This longitudinal study examined the development of phonology and literacy in Dutch-speaking children at family risk of dyslexia and in matched controls. Measures were administered in kindergarten (before the start of formal reading instruction), in first and in third grade. Children, diagnosed with dyslexia in third grade, showed impaired phonological awareness (PA), verbal short-term memory, and rapid automatic naming ability (RAN) at all time points, with the deficit in PA aggravating over time. These children also performed more poorly in letter knowledge, word and nonword reading accuracy and speed, and spelling at each time point. Children at family risk of dyslexia who did not fulfil criteria for dyslexia, scored more poorly than low-risk controls on the literacy and phonological measures that required the most fine-grained phonological representations. This suggests that the family risk of dyslexia is continuous rather than discrete. Hierarchical regression analyses demonstrated that PA and RAN were initially the most important instigators of reading accuracy and reading speed, respectively. After 2 years of reading instruction, only RAN predicted reading speed and accuracy. Letter knowledge, reading accuracy, and reading speed also contributed to the development of PA.