The problem of providing surgical navigation using image overlays on the operative scene can be split into four main tasks--calibration of the optical system; registration of preoperative images to the patient; system and patient tracking, and display using a suitable visualization scheme. To achieve a convincing result in the magnified microscope view a very high alignment accuracy is required. We have simulated an entire image overlay system to establish the most significant sources of error and improved each of the stages involved. The microscope calibration process has been automated. We have introduced bone-implanted markers for registration and incorporated a locking acrylic dental stent (LADS) for patient tracking. The LADS can also provide a less-invasive registration device with mean target error of 0.7 mm in volunteer experiments. These improvements have significantly increased the alignment accuracy of our overlays. Phantom accuracy is 0.3-0.5 mm and clinical overlay errors were 0.5-1.0 mm on the bone fiducials and 0.5-4 mm on target structures. We have improved the graphical representation of the stereo overlays. The resulting system provides three-dimensional surgical navigation for microscope-assisted guided interventions (MAGI).