The role of osteoblasts in inducing the proliferation and differentiation of bone marrow cells was examined. Conditioned medium obtained from mouse osteoblastic cell (MC3T3-E1) cultures stimulated colony formation of mouse bone marrow cells (CSF) and differentiation of mouse myeloid leukemia cells (M1) into macrophage-like cells (D-factor). The CSF activity increased time dependently in parallel with the increase of alkaline phosphatase activity during the culturing of the MC3T3-E1 cells. The activity of the D-factor attained a maximum on days 12 - 15 and decreased thereafter. Both the CSF and the D-factor were eluted in a range of 25,000 to 67,000 daltons on gel filtration. The fraction containing both factors exhibited bone-resorbing activity. These results suggest that osteoblasts are involved in bone resorption at least in part by enhancing the proliferation and differentiation of osteoclast progenitors.