Temporal lobectomy is an effective therapy for medically refractory temporal lobe epilepsy (TLE), but may be complicated by amnestic syndromes. Therefore, pre-surgical evaluation to assess the risk/benefit ratio for surgery is required. Intracarotid amobarbital testing (IAT) is currently the most widely used method for assessing pre-surgical memory lateralization, but is relatively invasive. Over the past decade functional MRI (fMRI) has been shown to correlate with IAT for language lateralization, and also for memory lateralization in a small number of patients. This study was carried out to compare fMRI during memory encoding with IAT testing for memory lateralization, and to assess the predictive value of fMRI during memory encoding for post-surgical memory outcome. Thirty-five patients with refractory TLE undergoing pre-surgical evaluation for temporal lobectomy and 30 normal subjects performed a complex visual scene-encoding task during fMRI scanning at 1.5 T using a 10-min protocol. Encoding performance was evaluated with subsequent recognition testing. Twenty-three patients also completed the same task again outside the scanner, an average of 6.9 months following surgery. A region of interest (ROI) analysis was used to quantify activation within hippocampal and a larger mesial temporal lobe ROI consisting of hippocampus, parahippocampus and fusiform gyrus (HPF) as defined by a published template. Normal subjects showed almost symmetrical activation within these ROI. TLE patients showed greater asymmetry. Asymmetry ratios (ARs) from the HPF ROI correlated significantly with memory lateralization by intracarotid amobarbital testing. HPF ARs also correlated significantly with memory outcome, as determined by a change in scene recognition between pre-surgical and post-surgical trials. When absolute activation within the HPF ROI was considered, a significant inverse correlation between activation ipsilateral to temporal lobectomy and memory outcome was observed, with no significant correlation in the contralateral HPF ROI. Although further technical improvements and prospective clinical validation are required, these results suggest that mesial temporal memory activation detected by fMRI during complex visual scene encoding correlates with post-surgical memory outcome and supports the notion that this approach will ultimately contribute to patient management.