Previous studies have shown that the development of morphological awareness and reading skills are interlinked. However, most have focused on phonological awareness as a risk factor for dyslexia, although there is considerable diversity in the underlying causes of this reading difficulty. Specifically, the relationship between phonology, derivational morphology, and dyslexia in the Finnish language remains unclear. In the present study, we used magnetoencephalography (MEG) to measure the brain responses to correctly and incorrectly derived Finnish nouns in 34 first grade Finnish children (21 typically developing and 13 with familial risk for dyslexia). In addition, we compared longitudinally the morphological information processing of 27 children (16 typically developing and 11 at-risk for dyslexia) first at pre-school age and then at first grade age. The task consisted of 108 pairs of sentences, including a verb and its root with the derivational suffix/-jA/. Correctly and incorrectly derived forms were presented both as real words and pseudowords. The incorrectly derived nouns contained a morpho-phonological violation in the last vowel of the noun before the derivational suffix. The brain activation of the typically developing children in response to morphological information processing showed sensitivity to the morphologically correct vs. incorrect contrast only in the cases of the real words. Children at-risk for dyslexia showed sensitivity to the morphological information processing both for real words and pseudowords. However, no significant differences between the groups emerged either for the correct vs. incorrect morphological contrast or for the correctly and incorrectly derived forms separately. Interestingly, in our previous study, cluster-based permutation tests showed significant developmental behavioral and brain differences between the children at pre-school age and at first-grade age in the morphological information processing of real words and pseudowords. Our results indicate the important role of derivational morphology in the early phases of learning to read. • We examined morphological information processing in first grade children with and without risk for dyslexia with MEG. • The brain activity of the children without risk showed sensitivity to morphological information only for real nouns. • The children at-risk showed similar activity with typically developing children for real derived nouns and pseudo nouns. • No between group differences were found for the processing of the correct vs. incorrect nouns and pseudo nouns. • Significant developmental differences were found between ages, but no differences were found between groups.