We previously observed robust activation in the hippocampal region in response to novel valenced stimuli during an fMRI recognition memory paradigm in healthy individuals across the lifespan. In this study, we compared activation during the memory task in elderly controls (EC) and individuals with mild cognitive impairment (MCI). In 23 right-handed participants (15 EC, 8 MCI; 16M/7F; mean age=71.6), neural activity was compared for novel and previously learned (familiar) items. During encoding, participants viewed 10 B/W pictures of baby and elderly faces with happy/sad expressions repeated in a block 6x, alternating with blocks of 10 circles. Participants indicated whether each face was happy or sad. After a 20-minute consolidation period, the 10 encoded faces were presented 4x each intermixed with 40 new faces (half happy, half sad). Participants identified “new” or previously learned (“old”) faces. Random effects group analysis was performed using SPM5 to compare activity in response to novel vs familiar faces. Outside the scanner, participants viewed 40 new faces (half sad, half happy), 10 faces from the encoding scan, and 80 novel faces from the recognition scan. They indicated whether each face was “new” or “old” and rated valence and arousal of each face. EC showed significant activity in right fusiform and hippocampal regions in response to novel faces compared to previously learned faces (MNI coordinates FF: 40, -58, -14, T=8.07; pcorrected=.0001; HC: 22, -12, -16; T=5.60, puncorrected=.048). Significant activations were also observed in occipital and frontal cortices. A similar pattern was found in response to baby faces but did not hold for elderly faces, suggesting that arousal is important. MCI did not show increased activity in response to novel versus familiar faces in predicted regions. Groups did not significantly differ in overall reaction time/accuracy during encoding, valence/arousal ratings or accuracy during the post-scan task, or on the Florida Affect Battery, suggesting MCIs' affective perception was intact. MCIs were slower and less accurate during recognition scans. Lack of encoding-associated activity in MCIs suggests that continued studies of the functional correlates of the emotional-memory enhancement effect in the early stage of Alzheimer's disease are warranted.