Periosteum-derived progenitor cells (PDPCs) could be differentiated into cartilage using atelocollagen as a carrier and in the presence of transforming growth factor-b3 (TGF-b3). Chondrogenesis was verified by RT-PCR and Western blotting. Expression of the type II collagen mRNA was found from the differentiated PDPCs in atelocollagen 3 weeks after chondrogenic induction. The chondrogenic potential of the PDPCs was also verified by histochemical staining for type II collagen protein. Increased production of glycosaminoglycan shows that the PDPCs in atelocollagen could differentiate into chondrocytes under a chondrogenic environment. PDPCs can therefore be used as a cell source for cell-based therapies targeted toward the articular cartilage of the knee.