The use of periosteum as a cell source for the in vitro engineering of grafts for articular cartilage repair requires the development of methods to obtain high viable cell numbers in the early stages of culture. In this study, we demonstrate that the addition of a mitogen, fibroblast growth factor-2 (FGF-2), during the early stage of the in vitro culture of periosteum in the presence of transforming growth factor-beta1 (TGF-beta1), significantly enhances cell proliferation, which results in increased neo-cartilage formation at later stages. Periosteal explants were cultured in vitro within alginate or agarose based gels in the presence of either FGF-2 for the first week, TGF-beta1 for the first 2 weeks, FGF-2 and TGF-beta1 for the first week and first 2 weeks respectively, or no added factors. Consistent with previous studies, periosteum derived neo-chondrogenesis occurred only in the presence of TGF-beta1. The neo-cartilage was found to contain cartilage specific proteoglycans and Type-II collagen as determined by safranin-O and immunohistochemical staining respectively. Further medium supplementation with FGF-2 stimulated early cell proliferation (>3 fold higher total DNA content per explant at day 10). This resulted in a marked increase in the size of the cultured explants and in the total area of the explant staining positive for safranin-O (from around 50% to 85%, (p<0.05)) after 6 weeks culture. The ability to generate significant quantities of neo-cartilage within a biocompatible and biodegradable matrix such as alginate, which lacks the immunogenicity of agarose, could open new pathways to utilizing such constructs in articular cartilage tissue engineering applications.