The osteoclast is the primary bone-resorbing cell and is derived from the monocyte/macrophage lineage. Bipotent osteoclast precursors, which can form both osteoclasts and monocyte-macrophages, proliferate and differentiate to become unipotent post-mitotic committed osteoclast precursors. These post-mitotic committed precursors fuse to form the multinucleated osteoclast, which is then activated to resorb bone. A variety of soluble and membrane-bound factors play a critical role in regulating osteoclast formation, including growth factors, systemic hormones, and cells in the marrow microenvironment, such as osteoblasts and marrow stromal cells. Cell-to-cell interactions are important in both the formation and activity of the osteoclast. Recent molecular biological studies have identified transcription factors, such as c-fos and PU.1, which are required for osteoclast differentiation. In this review, we discuss the phenotypic changes that are induced as the cells mature from bipotent early precursors to mature osteoclasts; factors that have been identified that are involved in this process; and the role of marrow stromal cells and osteoblasts in osteoclast differentiation.