Tepoztlan is a very nice and peaceful place to visit. It's famous for its spas, meditation, alternative medicine clinics and a very traditional city center. It is a small town so you don't need a car to travel within the city.
From Mexico City, you may take the metro to the Tasqueña station and follow the "autobuses" signs to the southern bus depot next door. The various bus companies display their destinations and times. Pullman de Morelos offers bus service every 30 minutes and a one-way ticket cost 104 pesos in late 2012. The bus ride is comfortable, scenic and takes about an hour and a half. Upon arrival in Tepoztlan, the bus may drop you at a depot on the edge of town. Taxis will be waiting to take you to the main square for 40 pesos. Walking to the center will take 20-30 minutes or so.
Frequent buses run to and from various locations in Cuernavaca to the center of Tepoztlan.
Going back to Mexico city, it is possible to hitchhike by the toll booths at the edge of town.
Tepoztlan is a small quaint town and is easily walkable. Most of the activity is centered around its main square and along the main avenue, Avenida 5 de mayo.
There is an archeological site at the top of an easy-hikeable mountain (assuming you are in decent shape -- there are 400m of stairs) that is also famous for its "good vibrations". The pyramid, El Tepozteco, offers wonderful views of the surrounding area. The site may be reached by walking down Avenida 5 de mayo (in the direction away from where you entered the town). Continue until the street ends to the steps which mark the beginning of the trail. Make sure to bring water with you. The hike to the top is free but it will cost 37 pesos (in 2010) to access the pyramid. At the top you will also encounter coati, also known as a tejón. These animals, members of the raccoon family, are curious and will attempt to open backpacks to find food.
There is also a beautiful former convent called Dominico de la Navidad. It has been restored and entrance is free. It is located right off the main square.
If you are curious about it, the locals claim UFO sightings are common, wich mostly just adds to the "new age" vibe of the town. Ask about the "ovni" to hear strange tales.
Temazcal is an ancient mexican therapy that consists on a little igloo-shape room in which a group of people enter and medicinal plants are burned inside it and the place gets really warm. A guide asks people to sing ancient songs to make the experience more complete. Many hotels have this option either in groups or individual.
Tepoznieves has multiple locations around town (Av. 5 de mayo, 21) and their ice cream is famous. They may have up to 200 flavors available ranging from the pedestrian chocolate to more exotic rose petal, figs & mescal or carrot with chili.
La Posada de Tepoztec is located two blocks above the main square. In addition to offering beautiful (though pricey) lodging, the restaurant serves delicious local cuisine. Sit on the serene patio to enjoy the mountain and town views. Their Chicken Mole is delicious.
There are two camping places nearby: Camhomila and Meztitla, both nice and safe.
Posada Ali is nice place with a good view of the cliffs. It costs around $500 on weekdays (prices seem to vary).
Sleeping in Tepoztlan can be noisy at times (in December 2010, the curch bells seemed to ring on the half hour all night).