Cbfa1/Runx2 is a transcription factor essential for bone formation and osteoblast differentiation. Two major N-terminal isoforms of Cbfa1, designated type I/p56 (PEBP2aA1, starting with the sequence MRIPV) and type II/p57 (til-1, starting with the sequence MASNS), each regulated by distinct promoters, are known. Here, we show that the type I transcript is constitutively expressed in nonosseous mesenchymal tissues and in osteoblast progenitor cells. Cbfa1 type I isoform expression does not change with the differentiation status of the cells. In contrast, the type II transcript is increased during differentiation of primary osteoblasts and is induced in osteoprogenitors and in premyoblast C2C12 cells in response to bone morphogenetic protein-2. The functional equivalence of the two isoforms in activation and repression of bone-specific genes indicates overlapping functional roles. The presence of the ubiquitous type I isoform in nonosseous cells and before bone morphogenetic protein-2 induced expression of the type II isoform suggests a regulatory role for Cbfa1 type I in early stages of mesenchymal cell development, whereas type II is necessary for osteogenesis and maintenance of the osteoblast phenotype. Our data indicate that Cbfa1 function is regulated by transcription, cellular protein levels, and DNA binding activity during osteoblast differentiation. Taken together, our studies suggest that developmental timing and cell type-specific expression of type I and type II Cbfa isoforms, and not necessarily molecular properties or sequences that reside in the N-terminus of Cbfa1, are the principal determinants of the osteogenic activity of Cbfa1.