Recent studies suggest that human theta oscillations appear to be functionally associated with memory processes. It is less clear, however, to what type of memory sub-processes theta is related. Using a continuous word recognition task with different repetition lags, we investigate whether theta reflects the strength of an episodic memory trace or general processing demands, such as task difficulty. The results favor the episodic trace decay hypothesis and show that during the access of an episodic trace in a time window of approximately 200-400 ms, theta power decreases with increasing lag (between the first and second presentation of an item). LORETA source localization of this early theta lag effect indicates that parietal regions are involved in episodic trace processing, whereas right frontal regions may guide the process of retrieval. We conclude that episodic encoding can be characterized by two different stages: traces are first processed at parietal sites at approximately 300 ms, then further processing takes place in regions of the medial temporal lobe at approximately 500 ms. Only the first stage is related to theta, whereas the second is reflected by a slow wave with a frequency of approximately 2.5 Hz.