Corticosteroids and lenalidomide decrease red blood cell transfusion dependence in patients with Diamond-Blackfan anemia (DBA) and myelodysplastic syndrome (MDS), respectively. We explored the effects of dexamethasone and lenalidomide, individually and in combination, on the differentiation of primary human bone marrow progenitor cells in vitro. Both agents promote erythropoiesis, increasing the absolute number of erythroid cells produced from normal CD34(+) cells and from CD34(+) cells with the types of ribosome dysfunction found in DBA and del(5q) MDS. However, the drugs had distinct effects on the production of erythroid progenitor colonies; dexamethasone selectively increased the number of burst-forming units-erythroid (BFU-E), whereas lenalidomide specifically increased colony-forming unit-erythroid (CFU-E). Use of the drugs in combination demonstrated that their effects are not redundant. In addition, dexamethasone and lenalidomide induced distinct gene-expression profiles. In coculture experiments, we examined the role of the microenvironment in response to both drugs and found that the presence of macrophages, the central cells in erythroblastic islands, accentuated the effects of both agents. Our findings indicate that dexamethasone and lenalidomide promote different stages of erythropoiesis and support the potential clinical utility of combination therapy for patients with bone marrow failure.