The purpose of this research was to investigate rule learning in reading disabled (RD) and normal children (chronological age and reading age (RA) match) when required to (a) abstract rules independently, and (b) use rules after instruction. Study 1 required the children to solve problems using shapes and letters. Although there was no difference between groups in the rate of problem solving when children were asked to abstract rules independently, the pattern of errors was different. The RD children made a greater proportion of errors on the negative instance for the more complex problems. In particular, this occurred on the letter task which involved psycholinguistic categorization. After instruction, the RA controls made more errors than the other groups. Study 2 was an analogous pseudoword reading task. Even with statistical adjustment for differences in prior grapheme-phoneme (g-p) rule knowledge, the RD children performed less accurately than the RA controls when they had to abstract rules, although this was restricted to the most difficult rule (rule of e). There was no difference after instruction in rule application, although the pattern of errors and post-test results indicated that the RD children continued to experience decoding difficulty. These results suggest a phonologically based productive deficit which interferes with the learning of g-p rules. This may be part of a more general language deficit which includes psycholinguistic categorization. Despite the severity of this handicap, RD children seem responsive to instruction.