Thalidomide and its analogue lenalidomide are potent anti-inflammatory, anti-angiogenic and immunomodulatory drugs, successfully used for the treatment of hematological cancers, in particular multiple myeloma (MM). Both drugs reveal a dual mechanism of action: they target tumour cells by direct cytotoxicity and, indirectly, by interfering with several components of the bone marrow microenvironment. Lenalidomide and thalidomide are versatile drugs with a broad range of activities that potentiate the anti-MM effects of conventional and novel agents. Here, we review the mechanism of action of these drugs, providing a rationale for combination studies in order to improve patient outcome and reduce side effects.