We investigated the effects of BMP-2 and dexamethasone (Dex) on follistatin (FS) and activin A expressions in a mesenchymal progenitor cell line, ROB-C26 (C26). C26 cells stimulated to differentiate into osteoblastic cells by blocking myogenic differentiation after BMP-2 treatment and into adipocytes with Dex treatment. Alkaline phosphatase (ALP) mRNA expression and its activity in the confluent C26 cells were dose- and time-dependently stimulated by BMP-2, but inhibited by Dex. The stimulatory effect on FS and activin A mRNA expressions by BMP-2 and Dex were dose-dependent. Cycloheximide pre-treatment indicated that FS and activin A expressions appear to be the direct target of BMP-2 and Dex signaling. BMP-2 time-dependently increased FS and activin A levels. Dex also increased FS level, but induced a time-dependent biphasic effect on activin A level, a decrease (2-6 h) followed by an increase (12-72 h). The data of the ratio of activin A concentration in the culture media to that of FS (activin A:FS ratio) measured by ELISA showed that BMP-2-induced osteoblastic differentiation involved an activin-dominant microenvironment, whereas Dex-induced adipocyte differentiation involved a FS-dominant microenvironment. Excess FS suppressed the stimulatory ALP activity of BMP-2, whereas activin A prevented not only Dex-induced inhibitory ALP activity, but also adipogenesis via suppression of the adipocyte transcriptional factor cascade. These results indicate that BMP-2-induced activin-dominant microenvironment may be critical for osteoblastic differentiation by restricting the antagonistic effects of FS on BMP activity, while Dex-induced FS-dominant microenvironment may be critical for adipocyte differentiation by restricting the inhibitory action of activin A on adipocyte differentiation.