We designed and synthesized novel theranostic nanoparticles that showed the considerable potential for clinical use in targeted therapy, and non-invasive real-time monitoring of tumors by MRI. Our nanoparticles were ultra-small with superparamagnetic iron oxide cores, conjugated to erlotinib (FeDC-E NPs). Such smart targeted nanoparticles have the preference to release the drug intracellularly rather than into the bloodstream, and specifically recognize and kill cancer cells that overexpress EGFR while being non-toxic to EGFR-negative cells. MRI, transmission electron microscopy and Prussian blue staining results indicated that cellular uptake and intracellular accumulation of FeDC-E NPs in the EGFR overexpressing cells was significantly higher than those of the non-erlotinib-conjugated nanoparticles. FeDC-E NPs inhibited the EGFR-ERK-NF-κB signaling pathways, and subsequently suppressed the migration and invasion capabilities of the highly invasive and migrative CL1-5-F4 cancer cells. In vivo tumor xenograft experiments using BALB/c nude mice showed that FeDC-E NPs could effectively inhibit the growth of tumors. T2-weighted MRI images of the mice showed significant decrease in the normalized signal within the tumor post-treatment with FeDC-E NPs compared to the non-targeted control iron oxide nanoparticles. This is the first study to use erlotinib as a small-molecule targeting agent for nanoparticles.