Forty years on from its worldwide withdrawal, thalidomide is currently undergoing a remarkable renaissance as a novel and powerful immunomodulatory agent. Over the last decade it has been found to be active in a wide variety of inflammatory and malignant disorders where conventional therapies have failed. Recently, considerable progress has been made in elucidating its complex mechanisms of action, which include both anticytokine and antiangiogenic properties. However, in addition to its well known teratogenic potential, it has a significant side effect profile that leads to cessation of treatment in up to 30% of subjects. In response to this, two new classes of potentially safer and non-teratogenic derivatives have recently been developed. This review summarises the biological effects, therapeutic applications, safety profile, and future potential of thalidomide and its derivatives.