Two experiments were carried out to explore the units of analysis is used by children to read Dutch bisyllabic pseudowords. Although Dutch orthography is highly regular, several deviations from a one-to-one correspondence occur. In polysyllabic words, the grapheme e may represent three different vowels:/∊/, /e/, or /λ/. In Experiment 1, Grade 6 elementary school children were presented lists of bisyllabic pseudowords containing the grapheme e in the initial syllable representing a content morpheme, a prefix, or a random string. On the basis of general word frequency data, we expected the interpretation of the initial syllable as a random string to elicit the pronunciation of a stressed /e/, the interpretation of the initial syllable as a content morpheme to elicit the pronunciation of a stressed /∊/, the interpretation of the initial syllable as a content morpheme to elicit the pronunciation of a stressed /∊/, and the interpretation as a prefix to elicit the pronunciation of an unstressed /&lamda;/. We found both the pronunciation and the stress assignment for pseudowords to depend on word type, which shows morpheme boundaries and prefixes to be identified. However, the identification of prefixes could also be explained by the correspondence of the prefix boundaries in the pseudowords to syllable boundaries. To exclude this alternative explanation, a follow-up experiment with the same group of children was conducted using bisyllabic pseudowords containing prefixes that did not coincide with syllable boundaries versus similar pseudowords with no prefix. The results of the first experiment were replicated. That is, the children identified prefixes and shifted their assignment of word stress accordingly. The results are discussed with reference to a parallel dual-route model of word decoding