Carbon nanotubes (CNT)/chitosan films and fibers can find use in specialized applications like the artificial muscles and other intelligent switching devices. The dispersion state of the single walled carbon nanotubes (SWCNTs) in chitosan matrix plays a major role in deciding the ultimate properties of composite. A suitable chemical treatment for purification and functionalization of SWCNTs is reported. Optimal conditions to prepare water soluble and stable, dispersion of SWCNT in chitosan are presented. The dispersion behavior of purified and functionalized SWCNT was characterized by visual observations, transmission electron microscopy (TEM), and Raman spectroscopy. The dispersion obtained using functionalized SWCNT was stable, while the purified SWCNT dispersion showed limited stability. The better stability of functionalized SWCNT dispersion in chitosan was evidenced by improved interaction between chitosan and carboxyl functional groups of SWCNT.