During the initiation of endochondral ossification three events occur that are inextricably linked in time and space: chondrocytes undergo terminal differentiation and cell death, the skeletal vascular endothelium invades the hypertrophic cartilage matrix, and osteoblasts differentiate and begin to deposit a bony matrix. These developmental programs implicate three tissues, the cartilage, the perichondrium, and the vascular endothelium. Due to their intimate associations, the interactions among these three tissues are exceedingly difficult to distinguish and elucidate. We developed an ex vivo system to unlink the processes initiating endochondral ossification and establish more precisely the cellular and molecular contributions of the three tissues involved. In this ex vivo system, the renal capsule of adult mice was used as a host environment to grow skeletal elements. We first used a genetic strategy to follow the fate of cells derived from the perichondrium and from the vasculature. We found that the perichondrium, but not the host vasculature, is the source of both trabecular and cortical osteoblasts. Endothelial cells residing within the perichondrium are the first cells to participate in the invasion of the hypertrophic cartilage matrix, followed by endothelial cells derived from the host environment. We then combined these lineage analyses with a series of tissue manipulations to address how the absence of the perichondrium or the vascular endothelium affected skeletal development. We show that although the perichondrium influences the rate of chondrocytes maturation and hypertrophy, it is not essential for chondrocytes to undergo late hypertrophy. The perichondrium is crucial for the proper invasion of blood vessels into the hypertrophic cartilage and both the perichondrium and the vasculature are essential for endochondral ossification. Collectively, these studies clarify further the contributions of the cartilage, perichondrium, and vascular endothelium to long bone development.