Periosteal cells were enzymatically liberated from the tibiae of young chicks, introduced into cell culture, and allowed to reach confluence. The morphology of the cells gave the impression of a relatively homogeneous population of fibroblast-like cells. These cultured cells did not overtly express osteogenic or chondrogenic properties as judged by their morphology and the lack of reactivity with probes to phenotype-specific antigens of osteoblasts or chondrocytes. The cells were then replated at relatively high density and chronologically evaluated for the differentiation of bone and cartilage. These replated cells formed a multi-layer of fibroblast-like cells, the top portion of which eventually differentiated into bone tissue as evidenced by the presence of mineralization and immunocytochemical reactivity to bone Gla protein- and osteocyte-specific probes. Cells below this distinctive top layer differentiated into chondrocytes, which eventually further developed into hypertrophic chondrocytes as evidenced by their morphology and the presence of immunoreactive type X collagen in the matrix. Mineralization was also observed in the territorial matrix of these hypertrophic chondrocytes, when the culture was augmented with beta-glycerophosphate. Periosteal-derived cells replated at a lower density as controls did not show signs of osteochondrogenic differentiation. These observation suggest that periosteal-derived cells of young chicks contain mesenchymal cells which possess the potential to undergo terminal differentiation into osteogenic or chondrogenic phenotypes depending on local environmental or positional cues.