In this paper a morphological component with a limited capability to automatically interpret (and generate) derived words is presented. The system combines an extended two-level morphology [Trost, 1991a; Trost, 1991b] with a feature-based word grammar building on a hierarchical lexicon. Polymorphemic stems not explicitly stored in the lexicon are given a compositional interpretation. That way the system allows to minimize redundancy in the lexicon because derived words that are transparent need not to be stored explicitly. Also, words formed ad-hoc can be recognized correctly. The system is implemented in CommonLisp and has been tested on examples from German derivation.