Localization studies and genetic evidence have implicated cartilage-derived morphogenetic proteins-1, -2 (CDMP-1 and CDMP-2), and osteogenic protein-1 (OP-1) in the osteochondrogenic differentiation of mesenchymal progenitor cells during embryonic development and in postnatal life. Based on their expression pattern and the evidence that periosteum contains mesenchymal cells in the cambium layer that can undergo bone and cartilage formation, we hypothesized that CDMPs and OP-1 may be involved in long bone development and fracture healing. To test this hypothesis, periosteum-derived cells from young calves were cultured as monolayers under serum-free conditions with and without the addition of recombinant CDMP-1, CDMP-2 and OP-1. Phenotypic analysis indicate that periosteum-derived cell populations prepared, expanded, and cultured under the conditions described below, constitutively express messenger RNAs for the bone markers osteocalcin, osteopontin and collagen type I, and the chondrogenic markers collagen type II and aggrecan as determined by RT-PCR. Moreover, histologic examinations showed positive staining for alcian blue and alkaline phosphatase (AP). Treatment of periosteum-derived cells with CDMPs and OP-1 resulted in a dose-dependent increase of cell proliferation; CDMP-2 was less active in this regard. Furthermore, all growth factors enhanced osteogenic differentiation as assessed by a time- and dose-dependent stimulation of AP activity and OP-1 increased messenger RNA expression for osteocalcin and collagen type I. We further examined the effects of CDMPs and OP-1 on chondrogenic differentiation of periosteum-derived cells. Both CDMPs and OP-1 stimulated (35)S-sulfate incorporation into newly synthesized macromolecules with OP-1 having a more pronounced stimulatory effect when compared with CDMP-1 and CDMP-2. Our results indicate that distinct members of the BMP-family increase the mitotic and metabolic activity of periosteum-derived cells. The enhancement of both the chondrogenic and osteogenic differentiation suggests that these growth factors might contribute to the local regulation of bone formation and fracture repair.