During early bone formation, mesenchymal cells condense and then differentiate into collagen type II expressing chondrocytes that make up the cartilaginous bone anlagen. This anlage then becomes enclosed by the perichondrium. The mechanisms by which the perichondrium forms are not known. The purpose of this study was to determine whether epiphyseal chondrocytes can differentiate into perichondrial cells. Novel perichondrium markers were identified by expression microarray of microdissected rat perichondrium and growth plate cartilage. A dissection method that allowed for removal of contaminating perichondrium was developed and the absence was confirmed by histological examination and by expression of perichondrium markers. Perichondrium formation surrounding chondrocyte pellets was studied using histology, real time PCR, and in situ hybridization for chondrocyte and perichondrium markers. Cultured chondrocyte pellets developed an exterior perichondrium like layer. This surrounding tissue did not express chondrocyte markers, collagen type II and type X, as assessed by in situ hybridization. Instead, perichondrium markers, periostin, Dickkopf 3 (Dkk3), roundabout 2, cadherin 2, L galectin 1 (Lgals1), and thrombospondin 2 (Thbs2) were upregulated following formation of the perichondrium like layer as assessed by real time PCR. Interestingly, markers specific for the cambium layer, Dkk3, Thbs2, and Lgals1, but not for the fibrous layer, collagen type XIV and decorin, were upregulated. The findings suggest that epiphyseal chondrocytes of postnatal animals retain the potential to differentiate into perichondrial cells, supporting the hypothesis that the perichondrium originates from collagen type II expressing chondrocytes at the periphery of the cartilaginous bone template. © 2018 The Authors. JBMR Plus published by Wiley Periodicals, Inc. on behalf of American Society for Bone and Mineral Research.