Co-polymerization of a mixture of N-isoproprylacrylamide and acrylic acid in the presence of surface-modified gold nanoparticles leads to the formation of biocompatible hydrogel-coated composite nanoparticles.   These hybrid nanoparticles have been designed for the purpose of developing an optically modulated drug-delivery system that responds to ambient changes in temperature.  Controlled collapse of the hydrogel coating can be effected by heating the particles slightly above physiologic temperature.  Specifically, drug-impregnated hydrogel-coated nanoparticles can be photothermally activated by exposure to "tissue transparent" near-IR radiation, leading to collapse of the hydrogel coating and consequent drug release.