We have developed a new image-based guidance system for microsurgery using optical coherence tomography (OCT), which presents a virtual image in its correct location inside the scanned tissue. Applications include surgery of the cornea, skin, and other surfaces below which shallow targets may advantageously be displayed for the naked eye or low-power magnification by a surgical microscope or loupes (magnifying eyewear). OCT provides real-time highresolution (3 micron) images at video rates within a two or more millimeter axial range in soft tissue, and is therefore suitable for guidance to various shallow targets such as Schlemm's canal in the eye (for treating Glaucoma) or skin tumors. A series of prototypes of the "OCT penlight" have produced virtual images with sufficient resolution and intensity to be useful under magnification, while the geometrical arrangement between the OCT scanner and display optics (including a half-silvered mirror) permits sufficient surgical access. The two prototypes constructed thus far have used, respectively, a miniature organic light emitting diode (OLED) display and a reflective liquid crystal on silicon (LCoS) display. The OLED has the advantage of relative simplicity, satisfactory resolution (15 micron), and color capability, whereas the LCoS can produce an image with much higher intensity and superior resolution (12 micron), although it is monochromatic and more complicated optically. Intensity is a crucial limiting factor, since light flux is greatly diminished with increasing magnification, thus favoring the LCoS as the more practical system.