The innovative use of engineered nanomaterials in medicine, be it in therapy or diagnosis, is growing dramatically. This is motivated by the current extraordinary control over the synthesis of complex nanomaterials with a variety of biological functions (e.g. contrast agents, drug-delivery systems, transducers, amplifiers, etc.). Engineered nanomaterials are found in the bio-context with a variety of applications in fields such as sensing, imaging, therapy or diagnosis. As the degree of control to fabricate customized novel and/or enhanced nanomaterials evolves, often new applications, devices with enhanced performance or unprecedented sensing limits can be achieved. Of course, interfacing any novel material with biological systems has to be critically analyzed as many undesirable adverse effects can be triggered (e.g. toxicity, allergy, genotoxicity, etc.) and/or the performance of the nanomaterial can be compromised due to the unexpected phenomena in physiological environments (e.g. corrosion, aggregation, unspecific absorption of biomolecules, etc.). Despite the need for standard protocols for assessing the toxicity and bio-performance of each new functional nanomaterial, these are still scarce or currently under development. Nonetheless, nanotoxicology and relating adverse effects to the physico-chemical properties of nanomaterials are emerging areas of the utmost importance which have to be continuously revisited as any new material emerges. This review highlights recent progress concerning the interaction of nanomaterials with biological systems and following adverse effects.