PopSci.com has a somewhat enthusiastic article about the possibility of using fMRI to "uncover your private thoughts"- Mind-Reading Tech May Not Be Far Off.
Neuroscientists are already able to read some basic thoughts, like whether an individual test subject is looking at a picture of a cat or an image with a specific left or right orientation. They can even read pictures that you're simply imagining in your mind's eye. Even leaders in the field are shocked by how far we've come in our ability to peer into people's minds. Will brain scans of the future be able to tell if a person is lying or telling the truth? ... While we aren't there yet, these possibilities have dramatic social, legal and ethical implications.
But what do we mean by "mind-reading"? I guess what most people mean by the term is being able to tell what someone is thinking, being able to "hear" their private thoughts. A stereotypical fictional "telepath" can get inside their targets minds and tell exactly what's going through them.
Sadly, what most fMRI "mind-reading" experiments have done is rather less impressive. they've shown that it's possible to tell whether someone is thinking about one thing as opposed to a second thing. But only if you already know what both things are, and only if you have already "read" the pattern of neural activity that corresponds to each one.
So, you could scan someone while they are thinking about, say, cats, and then again while they are thinking about dogs. From that, you could work out whether they are thinking about cats or dogs at any given point in time (here's how). If they were thinking about anything else, you'd have no idea what it was, or worse, you'd think it was either a cat or a dog. A lion, for example, would probably activate many of the same pathways that a cat does.
The great majority of "mind-reading" studies are like this. It's still pretty cool, but it's no telepathy. Is there any prospect of true "mind-reading"? In other words, could you read a mental state without knowing what you were looking for in advance?
Maybe. The parts of the brain concerned with visual processing happen to be arranged in a relatively straightforward way,which means that there are predictable relationships between visual stimuli and the areas of the brain that are activated when looking at them. Reports have claimed that it's possible to infer which picture someone is looking at out of a large set (1) and even to reconstruct the image that someone is looking at based purely on the visual cortex activity (2,3). For a good explanation of the last paper, which attracted a lot of attention, see Neurophilosophy.
Such studies come closer to true "mind-reading", but thus far the technique only works with vision. Even assuming that the same areas of the brain light up when you're thinking about something (visual imagery) compared to when you're looking at it (visual perception), the best this method could achieve would be to tell what picture was in someone's head at a given time. In ten years it might be possible to put someone in a scanner and tell, straight off the bat, that they were picturing a small white dog. But if you wanted to know what they were thinking about that dog, you'd be out of luck.
To truly read someone's mind you would need to understand how every brain state relates to every mental state. In other words, you would need to know how the brain allows us to think. At the moment, we really have no ide about that, so true mind-reading remains over the horizon.
Edit: I must be telepathic because I just saw that Mind Hacks covered a new study about mind reading a few hours ago: I know where you are secretly attending! Yet again, it involves the visual cortex.