While being in the center of attention and exposed to other's evaluations humans are prone to experience embarrassment. To characterize the neural underpinnings of such aversive moments, we induced genuine experiences of embarrassment during person-group interactions in a functional neuroimaging study. Using a mock-up scenario with three confederates, we examined how the presence of an audience affected physiological and neural responses and the reported emotional experiences of failures and achievements. The results indicated that publicity induced activations in mentalizing areas and failures led to activations in arousal processing systems. Mentalizing activity as well as attention towards the audience were increased in socially anxious participants. The converging integration of information from mentalizing areas and arousal processing systems within the ventral anterior insula and amygdala forms the neural pathways of embarrassment. Targeting these neural markers of embarrassment in the (para-)limbic system provides new perspectives for developing treatment strategies for social anxiety disorders.