The aim of this study was to evaluate observer performance using T1-weighted spin-echo and fluid-sensitive MRI sequences in distinguishing between lipoma and atypical lipomatous tumour/well-differentiated liposarcoma (ALT/WDL). Magnetic resonance images of 51 patients with benign lipoma and ALT/WDL of the musculoskeletal system were reviewed. There were 33 benign lipomas and 18 ALT/WDL. The character of septa and nodularity of the fatty tumours on T1-weighted spin-echo sequences and the presence of high signal on fluid-sensitive sequences were assessed. Two independent observers took part. Observer agreement was measured. The two observers achieved sensitivities of 100 and 94% for T1-weighted images and 100% each for fluid-sensitive sequences. Specificities were 76 and 64% for T1-weighted and 70 and 73% for fluid-sensitive images. Observer agreement was very good (kappa 0.87 for T1-weighted and 0.88 for fluid-sensitive images). In distinguishing lipoma from ALT/WDL, observer performance was comparable using T1-weighted and fluid-sensitive MR sequences. High sensitivity and moderately high specificity were attained.