One of great puzzles in the false memory is effect of modality in false memory which was firstly reported and defined by Smith and Hunt in 1998, namely there is a lower false recognition to critical lures following visual presentation than following auditory presentation. Though the effect of study modality in false memory was explored on many written recall tests and on visual recognition tests by using the Deese-Roediger-McDermott (DRM) paradigm, only a few studies explored neurophysiological correlates of encoding phase in false memory using ERP techniques and the results were mixed. Urbach，Windmann，Payne and Kutas（2005）argued that item-specific encoding differences is a neural precursor of false memory, while Geng et al. (2007) suggested that increased active semantic associative processing or a gist representation was established for those items that elicited later false memory. The present study investigated the neural activity associated with cognitive processes underlying the encoding phase following visual presentation and auditory presentation by mean of ERP techniques to further tap into electrophysiological processes of modality effect in false memory. The experiment was conducted with 12 undergraduate students as subjects and 80 DRM lists as stimuli, in which participants studied 5 blocks (8 DRM lists in each block and 7 associated items in each DRM list) both in visual modality and in auditory modality, immediately followed by 5 visual old/new recognition tests respectively. The ERP recorded during encoding phase were computed according to whether the corresponding lure was or was not recognized later. The results showed that the effects of DIM (Difference in subsequent Illusory Memory) in visual modality during encoding phase is different from the DIM in auditory modality, namely DIM effect was found in visual modality at 300-500ms and 500-700ms and no DIM effect was found in auditory modality. The difference between visual and auditory modality suggested that the semantic associative processing or a gist representation was important to those items that elicited later false memory, which confirmed the findings of Geng et al (2007).