Targeted drug delivery to specific group of cells offers an attractive strategy to minimize the undesirable side effects and achieve the therapeutic effect with a lower dose. Both linear and cyclic peptides have been explored as trafficking moiety due to ease of synthesis, structural simplicity, and low probability of undesirable immunogenicity. Peptides derived from sequence of cell surface proteins, such as intercellular adhesion molecule-1 (ICAM-1), LHRH, Bombesin, and LFA-1, have shown potent binding affinity to the target cell surface receptors. Moreover, peptides derived from ICAM-1 receptor can be internalized by the leukemic T-cells along with the conjugated moiety offering the promise to selectively treat cancers and autoimmune diseases. Systematic analyses have revealed that physicochemical properties of the drug-peptide conjugates and their mechanism of receptor-mediated cellular internalization are important controlling factors for developing a successful targeting system. This review is focused on understanding the factors involved in the development of an effective drug-peptide conjugate with an emphasis on the chemistry and biology of the conjugates. Reported results on several promising drug-peptide conjugates have been critically evaluated. The approaches and results presented here will serve as a guide to systematically approach targeted delivery of cytotoxic drug molecules using peptides for treatment of several diseases.