In recent years, striking new evidence has demonstrated non-genetic inheritance of acquired traits associated with parental environmental exposures. In particular, this transgenerational modulation of phenotypic traits is of direct relevance to psychiatric disorders, including depression, post-traumatic stress disorder, and other anxiety disorders. Here we review the recent progress in this field, with an emphasis on acquired traits of psychiatric illnesses transmitted epigenetically via the male lineage. We discuss the transgenerational effects of paternal exposure to stress vs. positive stimuli, such as exercise, and discuss their impact on the behavioral, affective and cognitive characteristics of their progeny. Furthermore, we review the recent evidence suggesting that these transgenerational effects are mediated by epigenetic mechanisms, including changes in DNA methylation and small non-coding RNAs in the sperm. We discuss the urgent need for more research exploring transgenerational epigenetic effects in animal models and human populations. These future studies may identify epigenetic mechanisms as potential contributors to the 'missing heritability' observed in genome-wide association studies of psychiatric illnesses and other human disorders. This exciting new field of transgenerational epigenomics will facilitate the development of novel strategies to predict, prevent and treat negative epigenetic consequences on offspring health, and psychiatric disorders in particular.