Prefrontal cortex (PFC) activity associated with emotional evaluation and subsequent memory was investigated with event-related functional MRI (fMRI). Participants were scanned while rating the pleasantness of emotionally positive, negative, and neutral pictures, and memory for the pictures was tested after scanning. Emotional evaluation was measured by comparing activity during the picture rating task relative to baseline, and successful encoding was measured by comparing activity for subsequently remembered versus forgotten pictures (Dm effect). The effect of arousal on these measures was indicated by greater activity for both positive and negative pictures than for neutral ones, and the effect of valence was indicated by differences in activity between positive and negative pictures. The study yielded three main results. First, consistent with the valence hypothesis, specific regions in left dorsolateral PFC were more activated for positive than for negative picture evaluation, whereas regions in right ventrolateral PFC showed the converse pattern. Second, dorsomedial PFC activity was sensitive to emotional arousal, whereas ventromedial PFC activity was sensitive to positive valence, consistent with evidence linking these regions, respectively, to emotional processing and self-awareness or appetitive behavior. Finally, successful encoding (Dm) activity in left ventrolateral and dorsolateral PFC was greater for arousing than for neutral pictures. This finding suggests that the enhancing effect of emotion on memory formation is partly due to an augmentation of PFC-mediated strategic, semantic, and working memory operations. These results underscore the critical role of PFC in emotional evaluation and memory, and disentangle the effects of arousal and valence across PFC regions associated with different cognitive functions.