This is a phase 1, prospective, open-label, dose escalation study to evaluate the DLT and MTD of velcade with given in combination with thalidomide in patients with myelodysplasia. Treatment will be given as an outpatient. Patients will receive 4 days of Velcade (days 1, 4, 8, 11) and 21 days of thalidomide 50 mg/day for each 21 day cycle. There will be 3 cohorts of 3-6 patients each, plus 10 additional patients. The tree dose levels ill be 0.7, 1.0 and 1.3 mg/m2. Patients may continue to be treated up to 6 cycles. Cycles 2-6 will start within 2 weeks of completion of the previous cycle. Disease response will be evaluated after cycle 3 and 6.