The precursors of bone, cartilage, fat and muscle cells are likely to be derived from more primitive mesenchymal cells which exhibit some of the characteristics of stem cells. Despite extensive study of stromal cell differentiation, neither mesenchymal stem cells or the more committed, tissue-specific progenitors have been well characterized. Here we describe the use of flow cytometry to isolate from fetal rat periosteum a population of small, relatively agranular cells (S cells) that display stem cell characteristics. After plating, S cells demonstrated extensive self-renewal with osteogenic potential. Electron microscopy showed that S cells have high nuclear:cytoplasmic ratios with large condensed nuclei and a paucity of cytoplasmic organelles. Freshly sorted suspensions of immunocytochemically stained S cells did not express differentiation-associated markers such as type I, II, and III collagens, alkaline phosphatase or osteopontin. However following attachment, S cells became immunopositive for collagens I, II, III, osteopontin and also for the cell surface receptor CD44, which mediates cell attachment to hyaluronan and osteopontin. S-cells showed two discrete populations of surface-stained protein by sulforhodamine, wheat germ agglutinin and Thy-1. In contrast, large (L) cells that did not exhibit stem cell characteristics exhibited low staining levels for Thy-1 and for wheat germ agglutinin. These studies demonstrate that viable osteogenic precursor cells with the stem cell characteristics of self-renewal, high proliferative capacity and multipotentiality can be enriched from heterogeneous stromal cell populations with simple flow cytometric methods.