During endochondral bone formation, chondrocytes in the cartilaginous anlage of long bones progress through a spatially and temporally regulated differentiation program before being replaced by bone. To understand this process, we have characterized the differentiation program and analyzed the relationship between chondrocytes and their extracellular environment in the regulation of the program. Our results indicate that, within an epiphyseal growth plate, the zone of proliferating chondrocytes is not contiguous with the zone of hypertrophic chondrocytes identified by the transcription of the type X collagen gene. We find that the postproliferative chondrocytes which make up the zone between the zones of proliferation and hypertrophy specifically transcribe the gene for cartilage matrix protein (CMP). This zone has been termed the zone of maturation. The identification of this unique population of chondrocytes demonstrates that the chondrocyte differentiation program consists of at least three stages. CMP translation products are present in the matrix surrounding the nonproliferative chondrocytes of both the zones of maturation and hypertrophy. Thus, CMP is a marker for postmitotic chondrocytes. As a result of the changes in gene expression during the differentiation program, chondrocytes in each zone reside in an extracellular matrix with a unique macromolecular composition. Chondrocytes in primary cell culture can proceed through the same differentiation program as they do in the cartilaginous rudiments. In culture, a wave of differentiation begins in the center of a colony and spreads to its periphery. The cessation of proliferation coincides with the appearance of CMP and eventually the cells undergo hypertrophy and synthesize type X collagen. These results reveal distinct switches at the proliferative-maturation transition and at the maturation-hypertrophy transition during chondrocyte differentiation and indicate that chondrocytes synthesize new matrix molecules and thus modify their preexisting microenvironment as differentiation progresses. However, when "terminally" differentiated hypertrophic chondrocytes are released from their surrounding environment and incubated in pellet culture, they stop type X collagen synthesis, resume proliferation, and reinitiate aggrecan synthesis. Eventually they cease proliferation and reinitiate CMP synthesis and finally type X collagen. Thus they are capable of recapitulating all three stages of the differentiation program in vitro. The data suggest a high degree of plasticity in the chondrocyte differentiation program and demonstrate that the progression and maintenance of this program is regulated, at least in part, by the extracellular environment which surrounds a differentiating chondrocyte during endochondral bone formation.