After Newman and Twieg and others, we used a fast event-related functional magnetic resonance imaging (fMRI) design and contrasted the lexical processing of pseudowords and real words. Participants carried out an auditory lexical decision task on a list of randomly intermixed real and pseudo Chinese two-character (or two-syllable) words. The pseudowords were constructed by recombining constituent characters of the real words to control for sublexical code properties. Processing of pseudowords and real words activated a highly comparable network of brain regions, including bilateral inferior frontal gyrus, superior, middle temporal gyrus, calcarine and lingual gyrus, and left supramarginal gyrus. Mirroring a behavioral lexical effect, left inferior frontal gyrus (IFG) was significantly more activated for pseudowords than for real words. This result disconfirms a popular view that this area plays a role in grapheme-to-phoneme conversion, as such a conversion process was unnecessary in our task with auditory stimulus presentation. An alternative view was supported that attributes increased activity in left IFG for pseudowords to general processes in decision making, specifically in making positive versus negative responses. Activation in left supramarginal gyrus was of a much larger volume for real words than for pseudowords, suggesting a role of this region in the representation of phonological or semantic information for two-character Chinese words at the lexical level.