Bone is continuously destroyed and reformed to maintain constant bone volume and calcium homeostasis in vertebrates throughout their lives. Osteoblasts and osteoclasts are specialized cells responsible for bone formation and resorption, respectively. Recent developments in bone cell biology have greatly changed our conceptions of the regulatory mechanisms of the differentiation of osteoblasts and osteoclasts. Bone morphogenetic proteins (BMPs) play critical roles in osteoblast differentiation. The discovery of Smad-mediated signals revealed the precise functions of BMPs in osteoblast differentiation. Transcription factors, Runx2 and Osterix, are found to be essential molecules for inducing osteoblast differentiation, as indicated by the fact that both Runx2-null mice and Osterix-null mice have neither bone tissue nor osteoblasts. Smad transcriptional factors are shown to interact with other transcription regulators, including Runx2. Also, the recent discovery of receptor activator of NF-κB ligand (RANKL)–RANK interaction confirms the well-known hypothesis that osteoblasts play an essential role in osteoclast differentiation. Osteoblasts express RANKL as a membrane-associated factor. Osteoclast precursors that express RANK, a receptor for RANKL, recognize RANKL through the cell–cell interaction and differentiate into osteoclasts. Recent studies have shown that lipopolysaccharide and inflammatory cytokines such as tumor necrosis factor receptor-α and interleukin 1 directly regulate osteoclast differentiation and function through a mechanism independent of the RANKL–RANK interaction. Transforming growth factor-β super family members and interferon-γ are also shown to be important regulators in osteoclastogenesis. These findings have opened new areas for exploring the molecular mechanisms of osteoblast and osteoclast differentiation.