We studied the effects of transforming growth factor-beta and basic fibroblast growth factor on the regulation of proliferation and osteochondrogenic differentiation of periosteum-derived cells, which have the potential to differentiate into bone and hypertrophic cartilage in vitro. Histological observation revealed that transforming growth factor-beta stimulated chondrogenesis of periosteum-derived cells while basic fibroblast growth factor stimulated proliferation of fibroblast-like cells and inhibited osteochondrogenic differentiation. Immunohistochemical studies revealed that basic fibroblast growth factor inhibited the expression of osteocalcin. Transforming growth factor-beta enhanced uronic acid content but decreased DNA content, alkaline phosphatase activity, and calcium content. In contrast, basic fibroblast growth factor enhanced DNA content but decreased alkaline phosphatase activity, calcium content, and uronic acid content. In addition, transforming growth factor-beta shortened the time-course of gene expression of type-X collagen whereas basic fibroblast growth factor inhibited the gene expression. These results indicate that transforming growth factor-beta stimulates osteochondrogenic differentiation of periosteum-derived cells but inhibits proliferation. They also indicate that basic fibroblast growth factor stimulates proliferation of periosteum-derived cells but inhibits osteochondrogenic differentiation.