This study investigated whether L2 processing of derived words engages biphasic morphological decomposition, comprising morpho-orthographic segmentation followed by morpho-semantic integration, as L1 processing does. Using an overt priming paradigm (SOA = 300 ms), ERP responses were compared across morphological (e.g., farmer–farm), orthographic (e.g., cashew–cash) and semantic (e.g., doctor–nurse) priming conditions in native and L2 speakers. Results revealed that both language groups exhibited distinct priming effects for morphologically related prime–target pairs across the early and late N400 windows, reflecting morpho-orthographic segmentation and morpho-semantic integration, respectively, rather than additive effects of form and meaning overlap. However, the late negativity effect, reflecting intensified lateral inhibition among similar orthographic representations, was observed during orthographic priming only in native speakers, suggesting less efficient inhibitory control in L2 processing. These findings are discussed within the framework of the Shallow Structure Hypothesis, which has provided a theoretical basis for many previous L2 studies of derived-word processing.