Magnetic resonance imaging (MRI) has rapidly become an important tool in clinical medicine and biological research. Its functional variant (functional magnetic resonance imaging; fMRI) is currently the most widely used method for brain mapping and studying the neural basis of human cognition. While the method is widespread, there is insufficient knowledge of the physiological basis of the fMRI signal to interpret the data confidently with respect to neural activity. This paper reviews the basic principles of MRI and fMRI, and subsequently discusses in some detail the relationship between the blood–oxygen–level–dependent (BOLD) fMRI signal and the neural activity elicited during sensory stimulation. To examine this relationship, we conducted the first simultaneous intracortical recordings of neural signals and BOLD responses. Depending on the temporal characteristics of the stimulus, a moderate to strong correlation was found between the neural activity measured with microelectrodes and the BOLD signal averaged over a small area around the microelectrode tips. However, the BOLD signal had significantly higher variability than the neural activity, indicating that human fMRI combined with traditional statistical methods underestimates the reliability of the neuronal activity. To understand the relative contribution of several types of neuronal signals to the haemodynamic response, we compared local field potentials (LFPs), single– and multi–unit activity (MUA) with high spatio–temporal fMRI responses recorded simultaneously in monkey visual cortex. At recording sites characterized by transient responses, only the LFP signal was significantly correlated with the haemodynamic response. Furthermore, the LFPs had the largest magnitude signal and linear systems analysis showed that the LFPs were better than the MUAs at predicting the fMRI responses. These findings, together with an analysis of the neural signals, indicate that the BOLD signal primarily measures the input and processing of neuronal information within a region and not the output signal transmitted to other brain regions.