We investigated structural and functional changes in the medial temporal lobe (MTL) using magnetic resonance imaging (MRI) and compared the discriminative power of these measures with neuropsychological testing in mild cognitive impairment (MCI) and Alzheimer's disease (AD). Functional MRI (fMRI) was performed in 21 elderly controls, 14 MCI subjects, and 15 mild AD patients during encoding and cued retrieval of word-picture pairs. A region-of-interest-based approach in SPM2 was used to extract the extent of hippocampal activation. The volumes of the hippocampus and entorhinal cortex (EC) were manually outlined from anatomical MR images. Discriminant analyses were conducted to assess the ability of hippocampal fMRI, MTL volumetry, and neuropsychological measures to classify subjects into clinical groups. Entorhinal but not hippocampal volumes differed significantly between the control and MCI subjects. Both entorhinal and hippocampal volumes differed between MCI and AD patients. There were no significant differences in the extent of hippocampal fMRI activation during encoding or retrieval between the groups. Entorhinal volume was the best discriminator with a discriminating accuracy of 85.7% between controls and MCI, 86.2% between MCI and AD, and 97.2% between controls and AD. Delayed recall of a wordlist classified the subjects, second best, with a discriminating accuracy of 81.8% between controls and MCI, 75% between MCI and AD and 93.5% between controls and AD. The accuracy of hippocampal volumetry ranged from 42.9 to 69.4%, and hippocampal fMRI activation during encoding and retrieval had a classification accuracy of only 41.4-57.7% between the groups. Our results suggest that evaluation of entorhinal atrophy, in addition to the prevailing diagnostic criteria, seems promising in the identification of prodromal AD. Future technical improvements may improve the utilization of hippocampal fMRI for early diagnostic purposes.