Reconstruction of cartilage with perichondrium depends on the chondrogenic property of the perichondrial fibrocytes. The present investigation concerns the conditions for the differentiation of fibrocytes into chondrocytes both in vivo and in vitro. For the in vivo studies specimens of rib and auricular perichondrium from adult rabbits were wrapped round silicon rods which were enclosed in dialysis bags. One was placed in the suprapatellar pouch of the knee joint and one was placed intraperitoneally in each rabbit. After two months the bags were extracted, the perichondrium prepared for microscopic examination, and the chondrogenesis evaluated. In vitro the perichondrium was divided into small pieces and incubated with tissue culture medium. The medium was supplemented with fetal calf serum, together with epidermal growth factor, platelet derived growth factor, synovial fluid, or with human serum albumin (control group). After three weeks the explants were prepared for microscopy. Chondrogenesis was judged by the degree of cellular enlargement, capsule formation, deposition of matrix, and activation of the outer fibrocytic layer. In vivo, good cartilage development was found in all specimens placed in the knee joint but, in those placed intraperitoneally, little if any chondrogenesis was seen. In vitro profound differentiation occurred in all cultures supplemented with epidermal growth factor and platelet derived growth factor. An equivalent differentiation was found in perichondrium that had been incubated with synovial fluid. We conclude that the differentiation of perichondrial fibrocytes is initiated in vitro by growth factors. In addition, we have shown that synovial fluid contains factors that promote and enhance the development of cartilage from perichondrium.