Carbon Nanotubes (CNTs) have emerged as a potential candidate for application in targeted drug delivery, cancer treatment, gene therapy and diagnostics. This review critically evaluates the biomedical potential of CNTs, and possible toxicological implications. Success of CNTs in other fields has not yet been translated to the biomedical field due to the lack of consistent data on toxicity, variation of toxicity due to characteristics such as shape and size along with the method of preparation, and limited control over functionalized CNTs behavior. Thus there is a lack of a predictable toxicity pattern of CNTs. This review summarizes the key findings on the toxicity of CNTs and the role of functionalization with hydrophilic moieties to reduce their toxicity, and increase cell penetrability for drug delivery and gene therapy applications. Caution is urged when handling this 'wonder material' but the immense potential for its commercial utilization and clinical trials infuses hope for future biomedical applications. Journal of Nanomedicine & Nanotechnology J o u rna l of N a n o m ed icine & N a n o te chnolo g y