A moon near to the horizon is perceived larger than a moon at the zenith, although—obviously—the moon does not change its size. In this study, the neural mechanisms underlying the “moon illusion” were investigated using a virtual 3-D environment and fMRI. Illusory perception of an increased moon size was associated with increased neural activity in ventral visual pathway areas including the lingual and fusiform gyri. The functional role of these areas was further explored in a second experiment. Left V3v was found to be involved in integrating retinal size and distance information, thus indicating that the brain regions that dynamically integrate retinal size and distance play a key role in generating the moon illusion.