Membrane distillation (MD) is a developing membrane separation technology for water treatment that involves a vapor transport driven by the vapor pressure gradient across the hydrophobic membrane. MD has gained wide attention in the last decade for various separation applications, including the separation of salts, toxic heavy metals, oil, and organic compounds from aqueous solutions. Compared with other conventional separation technologies such as reverse osmosis, nanofiltration, or thermal distillation, MD is very attractive due to mild operating conditions such as low temperature and atmospheric pressure, and 100% theoretical salt rejection. In this review, membrane distillation’s principles, recent MD configurations with their advantages and limitations, membrane materials, fabrication of membranes, and their surface engineering for enhanced hydrophobicity are reviewed. Moreover, different types of membrane fouling and their control methods are discussed. The various applications of standalone MD and hybrid MD configurations reported in the literature are detailed. Furthermore, studies on the MD-based pilot plants installed around the world are covered. The review also highlights challenges in MD performance and future directions.