Episodic memory decline in late life can be improved by use of explicit goal-setting for performance. The neural correlates that underlie the benefits of goal-setting on memory performance have yet to be examined. Event-related functional magnetic resonance imaging (fMRI) was employed to investigate the neural correlates of memory encoding as a function of age and memory enhancement by goal-setting. FMRI data were obtained while 20 young adults (ages 18--28) and 20 older adults (ages 60--70) performed a list-learning task that was comprised of grocery items. Half of the young adult and half of the older adult groups received goals for performance achievement prior to list-learning, whereas the other half of the young adult and older adult groups did not receive performance goals. FMRI data were analyzed for signal increases related to the encoding period, as well as signal increases that correlated with subsequent recall performance of the word-lists. Young adults remembered a significantly greater number of words than older adults. Performance improvement derived from goal-setting was equivalent between young and older adults. Functional MRI findings revealed left lateralized prefrontal cortex (PFC) activation in young adults (not receiving goals), which is consistent with predictions of the hemispheric encoding and retrieval asymmetry (HERA) model. Older adults demonstrated left lateralized PFC activation as well. Consistent with predications of the hemispheric asymmetry reduction in older adults (HAROLD) model, the left PFC activity was significantly dampened in older adults. The effect of goal-setting on encoding activity was primarily constrained to the frontal lobes. Regions that demonstrated significantly greater activity in the goal group than in the no-goal group included the orbitofrontal cortex, dorsolateral prefrontal cortex, and Broca's area. Engagement of these regions likely reflects increased motivation and increased mnemonic processes, such as subvocal rehearsal. In conjunction with goal-setting, older adults activated several different regions to a greater extent than young adults. As these regions were observed to be activated during encoding in the absence of goal-setting, the differentially greater activation in older adults may reflect increased resources put toward mnemonic processing in older adults or decreased overall efficiency.