The differentiation factor NEL-like molecule-1 (NELL-1) has been reported as osteoinductive in multiple in vivo preclinical models. Bone morphogenetic protein (BMP)-2 is used clinically for skeletal repair, but in vivo administration can induce abnormal, adipose-filled, poor-quality bone. We demonstrate that NELL-1 combined with BMP2 significantly optimizes osteogenesis in a rodent femoral segmental defect model by minimizing the formation of BMP2-induced adipose-filled cystlike bone. In vitro studies using the mouse bone marrow stromal cell line M2-10B4 and human primary bone marrow stromal cells have confirmed that NELL-1 enhances BMP2-induced osteogenesis and inhibits BMP2-induced adipogenesis. Importantly, the ability of NELL-1 to direct BMP2-treated cells toward osteogenesis and away from adipogenesis requires intact canonical Wnt signaling. Overall, these studies establish the feasibility of combining NELL-1 with BMP2 to improve clinical bone regeneration and provide mechanistic insight into canonical Wnt pathway activity during NELL-1 and BMP2 osteogenesis. The novel abilities of NELL-1 to stimulate Wnt signaling and to repress adipogenesis may highlight new treatment approaches for bone loss in osteoporosis.