This study investigated the neural basis of compound word processing by using fMRI and Chinese two-character compounds for lexical decision. Semantic transparency and morphemic neighborhood size were manipulated to augment the processing profile for measurement. The behavioral results disclosed a semantic transparency effect and its interaction with the neighborhood size, which supported existence of a mechanism for compound processing. The fMRI results located a neural substrate in the left inferior prefrontal cortex (BA 45) which reacted in an interactive manner to the two variables. While its activities were lower when their neighborhood size was larger for processing transparent compounds, its activities became higher when their neighborhood size was larger for processing opaque compounds. When scaling to a larger scope, the function of this mechanism fitted well with the theoretical account of unification function of the left inferior frontal cortex for language processing.