Anterograde amnesia in Wernicke-Korsakoff syndrome is associated with diencephalic lesions, mainly in the anterior thalamic nuclei. Whether diencephalic and temporal lobe amnesias are distinct entities is still not clear. We investigated episodic memory for faces using functional MRI (fMRI) in eight controls and in a 34-year-old man with Wernicke-Korsakoff syndrome and diencephalic lesions but without medial temporal lobe (MTL) involvement at MRI. fMRI was performed with a 1.5 tesla unit. Three dual-choice tasks were employed: (i) face encoding (18 faces were randomly presented three times and subjects were asked to memorize the faces); (ii) face perception (subjects indicated which of two faces matched a third face); and (iii) face recognition (subjects indicated which of two faces belonged to the group they had been asked to memorize during encoding). All activation was greater in the right hemisphere. In controls both the encoding and recognition tasks activated two hippocampal regions (anterior and posterior). The anterior hippocampal region was more activated during recognition. Activation in the prefrontal cortex was greater during recognition. In the subject with Wernicke-Korsakoff syndrome, fMRI did not show hippocampal activation during either encoding or recognition. During recognition, although behavioural data showed defective retrieval, the prefrontal regions were activated as in controls, except for the ventrolateral prefrontal cortex. fMRI activation of the visual cortices and the behavioural score on the perception task indicated that the subject with Wernicke-Korsakoff syndrome perceived the faces, paid attention to the task and demonstrated accurate judgement. In the subject with Wernicke-Korsakoff syndrome, although the anatomical damage does not involve the MTL, the hippocampal memory encoding has been lost, possibly as a consequence of the hippocampal-anterior thalamic axis involvement. Anterograde amnesia could therefore be the expression of damage to an extended hippocampal system, and the distinction between temporal lobe and diencephalic amnesia has limited value. In the subject with Wernicke-Korsakoff syndrome, the preserved dorsolateral prefrontal cortex activation during incorrect recognition suggests that this region is more involved in either the orientation or attention at retrieval than in retrieval. The lack of activation of the prefrontal ventrolateral cortex confirms the role of this area in episodic memory formation.