This study has examined the osteogenic and chondrogenic differentiation of human foetal femur-derived cells in 3-dimensional pellet cultures. After culture for 21-28 days in osteogenic media, the pellets acquired a unique configuration that consisted of an outer fibrous layer, an osteoid-like shell surrounding a cellular and cartilaginous region. This configuration is typical to the cross section of the foetal femurs at the same age and was not observed in pellets derived from adult human bone marrow stromal cells. Time course study showed that after 7-14 days, the cells of the inner cellular region were viable, proliferated rapidly, and were immuno-positive for c-myc, as well as for bone sialoprotein and type I collagen. After 21-28 days, the cells accumulated at the inner edge of the osteoid shell. The direction of osteoid formation thus differed from that of periosteal bone formation. Following micro-dissection of the human foetal femurs into epiphyses, bone cylinder and hypertrophic cartilage, epiphyseal chondrocytes and osteoblasts both gave rise to osteoid-shell forming cells. These studies demonstrate the developmental plasticity of human foetal skeletal and epiphyseal chondrocytes and suggest that the microenvironment modulates lineage commitment and matrix formation. Furthermore, thisex vivomodel offers a new approach to delineate human bone development as well as a model with potential application for evaluation of therapeutic compounds for bone formation.