The increased consumer awareness of the health promoting effects of functional foods and nutraceuticals is the driving force of the functional food and nutraceutical market. Bioactive peptides are known for their high tissue affinity, specificity and efficiency in promoting health. For this reason, the search for food-derived bioactive peptides has increased exponentially. Over the years, many potential bioactive peptides from food have been documented; yet, obstacles such as the need to establish optimal conditions for industrial scale production and the absence of well-designed clinical trials to provide robust evidence for proving health claims continue to exist. Other important factors such as the possibility of allergenicity, cytotoxicity and the stability of the peptides during gastrointestinal digestion would need to be addressed. This review discusses our current knowledge on the health effects of food-derived bioactive peptides, their processing methods and challenges in their development.