Carbon nanotubes and materials based on carbon nanotubes have many perceived applications in the field of biomedicine. Several highly promising examples have been highlighted in the literature, ranging from their use as growth substrates or tissue scaffolds to acting as intracellular transporters for various therapeutic and diagnostic agents. In addition, carbon nanotubes have a strong optical absorption in the near-infrared region (in which tissue is transparent), which enables their use for biological imaging applications and photothermal ablation of tumors. Although these advances are potentially game-changing, excitement must be tempered somewhat as several bottlenecks exist. Carbon nanotube-based technologies ultimately have to compete with and out-perform existing technologies in terms of performance and price. Moreover, issues have been highlighted relating to toxicity, which presents an obstacle for the transition from preclinical to clinical use. Although many studies have suggested that well-functionalized carbon nanotubes appear to be safe to the treated animals, mainly rodents, long-term toxicity issues remains to be elucidated. In this report, we systematically highlight some of the most promising biomedical application areas of carbon nanotubes and review the interaction of carbon nanotubes with cultured cells and living organisms with a particular focus on in vivo biodistribution and potential adverse health effects. To conclude, future challenges and prospects of carbon nanotubes for biomedical applications will be addressed.