After an era in which lesion studies have identified the declarative memory system and its essential anatomical structures, functional imaging and event-related potential studies have begun to delineate the neural underpinnings of declarative memory formation at the system level. By memory formation, we refer to those mnemonic processes present during encoding that transform perceptual representations into enduring memories. Recent studies have revealed that distinct regions in medial temporal and prefrontal areas exhibit more neural activity during successful than unsuccessful memory formation. We attempt to identify the nature of the processes underlying these subsequent memory effects. Reviewed data suggest specific mnemonic operations in the medial temporal lobe that may be integrated with semantic/perceptual operations and subserving operations in the prefrontal cortex. The formation of relational and non-relational memories may be supported by distinct subregions within these two brain regions. While the medial temporal lobe may have a serial organizational structure, with a processing hierarchy, interactions between medial temporal and prefrontal areas seem to occur in a parallel and bi-directional fashion. Interacting with this system, emotionally arousing events enhance neural activity in the amygdala, which in turn may modulate processing in other brain regions responsible for declarative memory formation.