During conversion of preadipocytes to adipocytes, growth arrest and subsequent activation of adipocyte genes by the transcription factors, C/EBPα and PPARγ, lead to adipogenesis. During differentiation, these cells not only start expressing those genes necessary for adipocyte function, but also undergo changes in morphology to become rounded lipid filled adipocytes. Various factors in cell–cell communication or cell–matrix interaction may govern whether preadipocytes are kept in an undifferentiated state or undergo differentiation. In an attempt to identify molecules that play critical roles in the conversion of preadipocytes to adipocytes, we cloned by differential screening several regulatory molecules, including pref-1. Pref-1 is an inhibitor of adipocyte differentiation and is synthesized as a plasma membrane protein containing 6 EGF-repeats in the extracellular domain. Pref-1 is highly expressed in 3T3-L1 preadipocytes, but is not detectable in mature fat cells. Dexamethasone, a component of standard differentiation agents, inhibits pref-1 transcription and thereby promotes adipogenesis. Downregulation of pref-1 is required for adipose conversion and constitutive expression of pref-1 inhibits adipogenesis. Conversely, decreasing pref-1 levels by antisense pref-1 transfection greatly enhances adipogenesis. The ectodomain of pref-1 is cleaved to generate a biologically active 50 kDa soluble form. There are four major forms of membrane pref-1 resulting from alternate splicing. Two of these forms which have a deletion that includes the putative processing site proximal to the membrane do not produce a biologically active soluble form. This indicates that alternate splicing may determine the range of action, juxtacrine or paracrine, of pref-1.