Brain vasculature is a complex and interconnected network under tight regulatory control that exists in intimate communication with neurons and glia. Typically, hemodynamics are considered to exclusively serve as a metabolic support system. In contrast to this canonical view, we propose that hemodynamics also play a role in information processing through modulation of neural activity. Functional hyperemia, the basis of the fMRI BOLD signal, is a localized influx of blood correlated with neural activity levels. Functional hyperemia is considered by many to be excessive from a metabolic standpoint, but may be appropriate if interpreted as having an activity-dependent neuro-modulatory function. Hemodynamics may impact neural activity through direct and indirect mechanisms. Direct mechanisms include delivery of diffusible blood-borne messengers, and mechanical and thermal modulation of neural activity. Indirect mechanisms are proposed to act through hemodynamic modulation of astrocytes, which can in turn regulate neural activity. These hemo-neural mechanisms should alter the information processing capacity of active local neural networks. Here, we focus on analysis of neocortical sensory processing. We predict that hemodynamics alter the gain of local cortical circuits, modulating the detection and discrimination of sensory stimuli. This novel view of information processing, that includes hemodynamics as an active and significant participant, has implications for understanding neural representation and the construction of accurate brain models. There are also potential medical benefits of an improved understanding of the role of hemodynamics in neural processing, as it directly bears on interpretation of and potential treatment for stroke, dementia and epilepsy.