Recently, nanometer-sized magnetic particles have been intensively concerned and investigated due to their particularly large surface-to-volume ratio, quantum-size effect, magnetic character as well as their potential application in the area of bioscience and medicine. The most promising nanoparticles are magnetic iron oxide nanoparticles with appropriate surface modification, which have been widely used experimentally for numerous in vivo applications such as magnetic resonance imaging contrast enhancement, tissue repair, immunoassay, detoxification of biological fluids, drug delivery, hyperthermia and cell separation. To focus on one of the most important and fascinating subjects in nanobiotechnology, this review describes the current situation and development of magnetic iron oxide nanoparticles and their applications in drug delivery and hyperthermia in tumor-targeted therapy. The possible perspectives and some challenges to further development of these nanoparticles are also analyzed and discussed.