Ultrasound is now a clinically accepted modality in the management of osteoporosis. The most common commercial clinical devices assess fracture risk from measurements of attenuation and sound speed in cancellous bone. This review discusses fundamental mechanisms underlying the interaction between ultrasound and cancellous bone. Because of its two-phase structure (mineralized trabecular network embedded in soft tissue-marrow), its anisotropy, and its inhomogeneity, cancellous bone is more difficult to characterize than most soft tissues. Experimental data for the dependencies of attenuation, sound speed, dispersion, and scattering on ultrasound frequency, bone mineral density, composition, microstructure, and mechanical properties are presented. The relative roles of absorption, scattering, and phase cancellation in determining attenuation measurements in vitro and in vivo are delineated. Common speed of sound metrics, which entail measurements of transit times of pulse leading edges (to avoid multipath interference), are greatly influenced by attenuation, dispersion, and system properties, including center frequency and bandwidth. However, a theoretical model has been shown to be effective for correction for these confounding factors in vitro and in vivo. Theoretical and phantom models are presented to elucidate why cancellous bone exhibits negative dispersion, unlike soft tissue, which exhibits positive dispersion. Signal processing methods are presented for separating "fast" and "slow" waves (predicted by poroelasticity theory and supported in cancellous bone) even when the two waves overlap in time and frequency domains. Models to explain dependencies of scattering on frequency and mean trabecular thickness are presented and compared with measurements. Anisotropy, the effect of the fluid filler medium (marrow in vivo or water in vitro), phantoms, computational modeling of ultrasound propagation, acoustic microscopy, and nonlinear properties in cancellous bone are also discussed.