Developmental dyslexia is a specific disorder of reading acquisition characterized by a phonological core deficit. Sentence reading is also impaired in dyslexic readers, but whether semantic processing deficits contribute is unclear. Combining spatially and temporally sensitive neuroimaging techniques to focus on semantic processing can provide a more comprehensive characterization of sentence reading in dyslexia. We recorded brain activity from 52 children (16 with dyslexia, 31 controls) with functional magnetic resonance imaging (fMRI) and event-related potentials (ERP) in two separate counterbalanced sessions. The children silently read and occasionally judged simple sentences with semantically congruous or incongruous endings. fMRI and ERP activation during sentence reading and semantic processing was analyzed across all children and also by comparing children with dyslexia to controls. For sentence reading, we analyzed the response to all words in a sentence; for semantic processing, we contrasted responses to incongruous and congruous endings. Sentence reading was characterized by activation in a left-lateralized language network. Semantic processing was characterized by activation in left-hemispheric regions of the inferior frontal and superior temporal cortex and by an electrophysiological N400 effect after 240 ms with consistent left anterior source localization. Children with dyslexia showed decreased activation for sentence reading in inferior parietal and frontal regions, and for semantic processing in inferior parietal regions, and during the N400 effect. Together, this suggests that semantic impairment during sentence reading reduces dyslexic children's response in left anterior brain regions underlying the more phasic N400 effect and subsequently modulates the more sustained BOLD response in left inferior parietal regions.