While prenatal cocaine exposure (PCE) has been associated with arousal dysregulation and attentional impairments in both human and animal studies, the neurobiological bases of these teratogenic effects have not been well characterized. In the current study, we report functional neuroimaging observations of these effects in exposed youth. Using functional magnetic resonance imaging (fMRI), we embedded task-irrelevant emotional distracters in a working memory task to examine the interaction of emotional arousal and memory in 33 PCE and 23 non-exposed adolescents. Though with similar behavioral performance, the two groups exhibited different activation patterns associated with emotion-memory interactions. On the one hand, higher memory load attenuated emotion-related amygdala activation in controls but not in the exposed adolescents; on the other hand, prefrontal activation associated with memory load decreased in the presence of emotional distraction in the controls but increased in the exposed group. These group interaction differences suggest neurobiological substrates for arousal-associated neuronal alterations related to prenatal cocaine exposure. Consistent with previous findings in behavioral and physiological studies, the present neuroimaging data provided more in-depth evidence supporting the view that PCE has significant long-term teratogenic effect on arousal regulation system.