The lineage and state of differentiation of cells in the mammalian haemopoietic compartment is associated with specific patterns of homeobox gene expression (EMBO J. 7, 2131, 1988). Agents which influence homeobox gene expression are thus of great interest in the study of human leukemias. Retinoic acid has direct regulatory actions on homeobox gene transcription (TIBS 158, 52, 1989; Differentiation 37, 773, 1988) and can induce select human leukemia cell lines to undergo terminal differentiation in vitro (Proc. natl Acad. Sci. U.S.A. 77, 2936, 1980). Retinoic acid is also a known teratogen for vertebrate foetal limb-bud development. Some of the teratogenic effects are duplicated by the drug Thalidomide (Embryopathic Activity of Drugs, Little Brown, Boston, p. 167, 1965; Haematological Cytology, Wolf Med. Pub. Ltd, London, p. 118, 1982). To investigate Thalidomide for other retinoid-like effects, we exposed cultures of human leukemia K562 cells to the metabolites generated in a Thalidomide hepatic-microsomal enzyme drug metabolizing system (Proc. natl Acad. Sci. U.S.A. 78, 2545, 1981). Here we report evidence that a single 2 h pulse-exposure to Thalidomide metabolites, induces K562 cells to undergo morphological differentiation in vitro. We also demonstrate a significant cytotoxic effect for these metabolites.