We developed a culture system of cells isolated from juvenile human periosteum. The culture consisted of epithelial-like and fibroblast-like cells. Both types of cells had intense alkaline phosphatase activity maintained in subculture. When these cells, loaded into diffusion chambers, were implanted subcutaneously in rats, cartilage tissue was mainly formed and bone was seen scantily. 1α-OH-D₃ and 1,25-(OH)₂-D₃ increased the alkaline phosphatase activity and proteoglycan synthesis in the periosteal cells. Calcitonin also stimulated the proteoglycan synthesis, but parathyroid hormone had no effect.