Raman spectroscopy is a potentially important clinical tool for real-time diagnosis of disease and in situ evaluation of living tissue. The purpose of this article is to review the biological and physical basis of Raman spectroscopy of tissue, to assess the current status of the field and to explore future directions. The principles of Raman spectroscopy and the molecular level information it provides are explained. An overview of the evolution of Raman spectroscopic techniques in biology and medicine, from early investigations using visible laser excitation to present-day technology based on near-infrared laser excitation and charge-coupled device array detection, is presented. State-of-the-art Raman spectrometer systems for research laboratory and clinical settings are described. Modern methods of multivariate spectral analysis for extracting diagnostic, chemical and morphological information are reviewed. Several in-depth applications are presented to illustrate the methods of collecting, processing and analysing data, as well as the range of medical applications under study. Finally, the issues to be addressed in implementing Raman spectroscopy in various clinical applications, as well as some long-term directions for future study, are discussed.