The relationship between bone and fat formation within the bone marrow microenvironment is complex and remains an area of active investigation. Classical in vitro and in vivo studies strongly support an inverse relationship between the commitment of bone marrow-derived mesenchymal stem cells or stromal cells to the adipoctye and osteoblast lineage pathways. In this review, we focus on the recent literature exploring the mechanisms underlying these differentiation events and discuss their implications relevant to osteoporosis and regenerative medicine. J. Cell. Biochem. 98: 251–266, 2006. © 2006 Wiley-Liss, Inc.