In this report we review some of the recent progress made for enhancing the biocompatibility of luminescent quantum dots (QDs) and for developing targeted bio-inspired applications centered on live cell imaging and sensing. We start with a detailed analysis of the surface functionalization strategies developed thus far, and discuss their effectiveness for providing long term stability of the quantum dots in biological media, to changes in pH and to added electrolytes. We then discuss the available conjugation techniques to couple QDs to a variety of biological receptors and compare their effectiveness. In particular, we highlight the implementation of new strategies such as the use of copper-free cyclo-addition reaction (CLICK) chemistry and chemo-selective ligation. We then discuss the advances made for intracellular delivery where ideas such as receptor-driven endocytosis and uptake promoted by cell penetrating peptides are used. We then describe a few representative examples where QDs have been used to investigate specific cell biology processes. Such processes include binding of QDs conjugated to the nerve growth factor to membrane specific receptors and intracellular uptake, tracking of membrane protein at the single molecule level, and recognition of ligand bound QDs by T cell receptors. We conclude by discussing issues of toxicity associated with the use of QDs in biology.