The developmental potential of periosteum-derived cells was clonally assessed with an agar gel culture system. Morphologically, two types of colonies were predominantly observed. By immunocytochemical observation with antibodies against aggrecan or bone Gla protein, one type of colony was judged to be chondrogenic, and the other osteogenic. By chronological observation, each type of colony did not convert to the other. Supplementation with transforming growth factor (TGF)-beta 1 shortened the time course of chondrogenesis and also increased colony forming efficiency of chondrogenic colonies. On the other hand, colony forming efficiency of osteogenic colonies decreased with TGF-beta 1 treatment, whereas the time course of osteogenesis remained unaffected. These observations suggest that there are both committed osteoprogenitor and chondroprogenitor cells present in the periosteal cell population, and TGF-beta 1 stimulates proliferation and differentiation of chondrogenic cell population by its targeted action.