Multifunctional nanoparticles integrated with imaging modalities (such as magnetic resonance and optical) and therapeutic drugs are promising candidates for future cancer diagnostics and therapy. While targeted drug delivery and imaging of tumor cells have been the major focus in engineering nanoparticle probes, no extensive efforts have been made towards developing sensing probes that can confirm and monitor intracellular drug release events. Here, we present quantum dot (Qdot)-iron oxide (IO) based multimodal/multifunctional nanocomposite probe that is optically and magnetically imageable, targetable and capable of reporting on intracellular drug release events. Specifically, the probe consists of a superparamagnetic iron oxide nanoparticle core (IONP) decorated with satellite CdS:Mn/ZnS Qdots where the Qdots themselves are further functionalized with STAT3 inhibitor (an anti-cancer agent), vitamin folate (as targeting motif) and m-polyethylene glycol (mPEG, a hydrophilic dispersing agent). The Qdot luminescence is quenched in this nanocomposite probe ("OFF" state) due to combined electron/energy transfer mediated quenching processes involving IONP, folate and STAT3 agents. Upon intracellular uptake, the probe is exposed to the cytosolic glutathione (GSH) containing environment resulting in restoration of the Qdot luminescence ("ON" state), which reports on uptake and drug release. Probe functionality was validated using fluorescence and MR measurements as well as in vitro studies using cancer cells that overexpress folate receptors.