Two-dimensional carbon-based nanomaterials, including graphene oxide and graphene, are potential candidates for biomedical applications such as sensors, cell labeling, bacterial inhibition, and drug delivery. Herein, we explore the biocompatibility of graphene-related materials with controlled physical and chemical properties. The size and extent of exfoliation of graphene oxide sheets was varied by sonication intensity and time. Graphene sheets were obtained from graphene oxide by a simple (hydrazine-free) hydrothermal route. The particle size, morphology, exfoliation extent, oxygen content, and surface charge of graphene oxide and graphene were characterized by wide-angle powder X-ray diffraction, atomic force microscopy, X-ray photoelectron spectroscopy, dynamic light scattering, and zeta-potential. One method of toxicity assessment was based on measurement of the efflux of hemoglobin from suspended red blood cells. At the smallest size, graphene oxide showed the greatest hemolytic activity, whereas aggregated graphene sheets exhibited the lowest hemolytic activity. Coating graphene oxide with chitosan nearly eliminated hemolytic activity. Together, these results demonstrate that particle size, particulate state, and oxygen content/surface charge of graphene have a strong impact on biological/toxicological responses to red blood cells. In addition, the cytotoxicity of graphene oxide and graphene sheets was investigated by measuring mitochondrial activity in adherent human skin fibroblasts using two assays. The methylthiazolyldiphenyl-tetrazolium bromide (MTT) assay, a typical nanotoxicity assay, fails to predict the toxicity of graphene oxide and graphene toxicity because of the spontaneous reduction of MTT by graphene and graphene oxide, resulting in a false positive signal. However, appropriate alternate assessments, using the water-soluble tetrazolium salt (WST-8), trypan blue exclusion, and reactive oxygen species assay reveal that the compacted graphene sheets are more damaging to mammalian fibroblasts than the less densely packed graphene oxide. Clearly, the toxicity of graphene and graphene oxide depends on the exposure environment (i.e., whether or not aggregation occurs) and mode of interaction with cells (i.e., suspension versus adherent cell types).