Periosteal cells were enzymatically isolated from the tibiae of young chicks, introduced into cell culture, allowed to reach confluence, and subcultured. The freshly isolated or subcultured cells were loaded into diffusion chambers and implanted into the peritoneal cavity of athymic mice to test their osteo-chondrogenic potential in a contained in vivo location. Freshly isolated periosteal cells formed both bone and cartilage tissue in such test chambers, but with a relatively low incidence. In contrast, cultured periosteal cells consistently gave rise to bone and cartilage even after 10 population doublings. With further passages of cells, the osteo-chondrogenic potential diminished substantially, until complete loss of expressivity at 16 population doublings or longer. Cultured muscle fibroblasts, when loaded into diffusion chambers under identical conditions to those of cultured periosteal cells, formed neither bone nor cartilage. These observations suggest that periosteal cells of young chicks contain subsets of progenitor cells or mesenchymal stem cells which possess the potential to differentiate into osteoblasts or chondrocytes, and this potential is retained after enzymatic isolation and for several population doublings in culture.