This study examined the effects of language impairment (LI) and bilingualism across vocabulary, morphology and verbal memory in a sample of children learning Dutch. Children (M-age = 71 months) were assigned to a monolingual group with typical development (TD) (n = 30), bilingual TD (n = 30), monolingual LI (n = 30) or bilingual LI group (n = 30). Vocabulary was measured with the Peabody Picture Vocabulary Test, morphology with the Taaltoets Alle Kinderen, verbal short-term (VSTM) and working memory (VWM) with forward and backward digit span tasks. Language knowledge (vocabulary, morphology) was affected by LI and bilingualism. Language processing (VSTM, VWM) was influenced by LI only. When language knowledge was controlled, the bilinguals outperformed the monolinguals on VSTM and VWM when TD and LI were collapsed. Bilingualism aggravated the effects of LI for vocabulary. Bilingualism may create a risk for the vocabulary knowledge of children with LI, but might be beneficial for their verbal memory.