To determine the effect of dexamethasone on the antimyeloma effects of lenalidomide, we tested in vitro proliferation, tumor suppressor gene expression, caspase activity, cell cycling, and apoptosis levels in a series of multiple myeloma (MM) and plasma cell leukemia cell lines treated with lenalidomide and dexamethasone, alone or in combination. The effect of dexamethasone on the immunomodulatory activities of lenalidomide such as T cell and natural killer (NK) cell activation was measured via interleukin [IL]-2 production, and interferon-gamma and granzyme B production respectively. Lenalidomide inhibited proliferation in most cell lines tested, and this effect was enhanced by dexamethasone. This effect was observed in MM cells containing the high-risk cytogenetic abnormalities t(4;14), t(14;16), del17p, del13, and hypodiploidy. Mechanistically, lenalidomide plus dexamethasone synergistically induced expression of the tumor suppressor genes Egr1, Egr2, Egr3, p15, p21, and p27 in MM cell lines and MM patient cells. The combination activated caspases 3, 8, and 9; and induced cell cycle arrest and apoptosis. Lenalidomide alone increased T cell production of IL-2, and NK cell production of interferon-gamma and granzyme B. Notably, dexamethasone antagonized these immunostimulatory effects of lenalidomide in a dose-dependent manner. These data further elucidate the mechanism of action of lenalidomide and dexamethasone in MM, and suggest that use of low-dose dexamethasone with lenalidomide may retain the antiproliferative effect of lenalidomide while permitting greater immunomodulatory effects of this combination regimen.