The lexical effect is a phenomenon whereby lexical information influences the perception of the phonetic category boundary for stimuli from word–nonword continua. At issue is whether this effect is due to “top-down” influence of upper levels of processing on perceptual processing, or instead is due to decision-stage processes. In this study, brain activity was monitored using functional magnetic resonance imaging as subjects performed a phonetic categorization task on items taken from 2 continua in which one end of the continuum was a real word and the other was not (gift–kift and giss–kiss). If the lexical effect has a perceptual basis, modulation of activation should be seen as a function of the lexical effect in areas such as the superior temporal gyri (STG) which have previously been implicated in perceptual processing. In contrast, if the effect is purely due to decision-related factors, such modulation would be expected only in areas which have been linked to executive processes, such as frontal and midline structures. Modulation of activation as a function of the lexically biased shift in phonetic category boundary was observed in the STG bilaterally as well as in frontal and midline structures. This activation pattern suggests that the lexical effect has at minimum a perceptual component, in addition to an executive decision-related component. These results challenge the view that lexical effects on phonetic boundary placement are due solely to postperceptual, decision-stage processes, and support those models of language processing which allow for higher-level lexical information to directly influence the perception of incoming speech.