The overlay of functional and morphological images is an essential tool for advanced and improved functional diagnosis showing the correlation between spatial structures or lesions and functional areas. We present an improved coordinate system matching technique. The well known method of three orthogonal coils combined in one coilset for an angular-independent measure is validated for the use of first- or higher order gradiometers instead of magnetometers. The coilset localization procedure was modified with lock-in detection and current feedback for better long range sensitivity. Real measurements with the 31-channel Philips-MEG system have been carried out. A very good localization accuracy below the measuring area with deviations below 2 mm was found. For coordinate system matching, a 3-D cursor with surface images from segmented MR-data was implemented and an optimized, weighted least squares fit transformation algorithm between functional and morphological systems was developed. The resulting transformations consist of weighted shifts and best-fit rotations and lead to deviations of marker positions in the mm range, depending mainly on the spatial accuracy of the marker fixation.