This research is motivated by the scarcity of investigation into L2 learners' online processing problems in listening comprehension, in particular those relating to L2 proficiency. It aims to identify the online processing problems encountered by Hong Kong students of differing L2 proficiency and whether these problems can be overcome by compensatory schema use. Two questions are addressed: 1) Given the same listening situation, do high and low proficiency students experience the same online processing problems? 2) Does success in compensatory schema use vary according to L2 proficiency? Four data collection methods (semi-structured interviews, questionnaire survey, partial transcription, and introspection) and both quantitative and qualitative data analyses are employed. Exploratory semi-structured interviews indicate that apart from the problems of unfamiliar topics, vocabulary and accents, students report experiencing what might be called an "acoustic blur" during L2 listening. They hear streams of English speech sounds but cannot identify the key words. Even when they think they have identified the words, these words often do not fit the context. The questionnaire survey was designed using the data gathered from the semi-structured interviews. The survey results show that practice frequency has a significant effect on students' perception of overall listening difficulty; the more often the practice, the less often listening problems are perceived. Slightly more than one third of respondents have almost no listening practice in English outside class. L2 proficiency impacts significantly on students' perceptions of processing problems such as those caused by unfamiliar topics and vocabulary, and failure in sound segmentation and word recognition. In their self-assessment of word recognition, low proficiency students' word recognition in an average lecture and TV program is less than 50% and 40% respectively, whereas that of proficient students is 80% and 65%. These