Functional magnetic resonance imaging (fMRI) was used to study memory-associated activation of medial temporal lobe (MTL) regions in 32 nondemented elderly individuals with mild cognitive impairment (MCI). Subjects performed a visual encoding task during fMRI scanning and were tested for recognition of stimuli afterward. MTL regions of interest were identified from each individual's structural MRI, and activation was quantified within each region. Greater extent of activation within the hippocampal formation and parahippocampal gyrus (PHG) was correlated with better memory performance. There was, however, a paradoxical relationship between extent of activation and clinical status at both baseline and follow-up evaluations. Subjects with greater clinical impairment, based on the Clinical Dementia Rating Sum of Boxes, recruited a larger extent of the right PHG during encoding, even after accounting for atrophy. Moreover, those who subsequently declined over the 2.5 years of clinical follow-up (44% of the subjects) activated a significantly greater extent of the right PHG during encoding, despite equivalent memory performance. We hypothesize that increased activation in MTL regions reflects a compensatory response to accumulating AD pathology and may serve as a marker for impending clinical decline.