Leflunomide (Arava) has recently been approved by the Food and Drug Administration for the treatment of rheumatoid arthritis (RA). The drug, due to its protective effects on structural joint damage, has been classified as a disease modifying anti-rheumatic drug (DMARD). Leflunomide is structurally dissimilar from other drugs currently used to treat RA and exhibits a different mechanism of action. It has shown to be protective in a variety of animal models of arthritis and autoimmunity based on its immunomodulatory activity. Leflunomide is rapidly converted in vivo to its pharmacologically active metabolite A77 1726. This metabolite is a potent non-cytotoxic inhibitor of the enzyme dihydroorotate dehydrogenase (DHODH), a key enzyme in the de novo synthesis of uridine monophosphate (UMP). Activated lymphocytes depend on the pyrimidine de novo syntheses to fulfill their metabolic needs for clonal expansion and terminal differentiation into effector cells. De novo synthesis of pyrimidines is not only essential to provide precursors for new RNA and DNA synthesis, but also for phospholipid synthesis and the pyrimidine sugars necessary for protein glycosylation, which support the massive expansion in membrane biosynthesis to form daughter cells. This mechanism likely contributes to leflunomide's action as a DMARD in RA and other autoimmune diseases. This review is a summary of current in vivo and in vitro data, focussing primarily on the mechanism of action of leflunomide in RA.