A biocompatible and water-soluble poly( amino acid) derivative, with a hydrophilic backbone and side chains facilitating linkage to the surfaces of nanoparticles was used to coat hydrophobic Fe(3)O(4) nanoparticles. Such nanoparticles, (4-11 nm), were coated by coordinate bonding and hydrophobic interactions with a hydrophilic poly( amino acid) derivative, poly(2-hydroxyethyl aspartamide). This is a new method for the transfer of hydrophobic nanoparticles from organic solvents into water. The biocompatible poly(amino acid)-coated Fe(3)O(4) nanoparticles were smaller than 30 nm in aqueous solutions, extremely stable, and maintained their stability even after several lyophilizations. The poly(amino acid)-coated nanoparticles showed no cytotoxicity, good saturation magnetization, and high T(2) relaxivity coefficients (r(2) values). The poly( amino acid)-coated Fe(3)O(4) nanoparticles demonstrate strong potential in bioapplications such as magnetic resonance imaging (MRI).