This study examined the ability of cells isolated from early healing segmental defects and from tissue from chronic nonunions to support bone and cartilage formation in vivo and their response to transforming growth factor-beta1 in vitro. Ostectomies (3 mm) were created in the radial diaphysis of four dogs. The dogs were splinted 3-5 days postoperatively and then allowed to bear full weight. At 7 days, tissue in the defect was removed and any periosteum was discarded; cells in the defect tissue were released by enzymatic digestion. The dogs were splinted again and allowed to bear full weight for 12 weeks. Radiographs confirmed a persistent nonunion in each dog. Defect tissue was again removed, any periosteum was discarded, and cells were isolated. Cells were also obtained from the defect tissue by nonenzymatic means with use of explant cultures. One-half of the tissue and one-half of any preconfluent, first-passage cultures were shipped to Cleveland by overnight carrier. At second passage, cells were loaded into ceramic cubes and implanted into immunocompromised mice for 3 or 6 weeks. Harvested cubes were examined histologically for cartilage and bone with use of a semiquantitative scoring system. Confluent fourth-passage cultures of 7 and 84-day defect tissue cells were cultured with 0.03-0.88 ng/ml transforming growth factor-beta1 for 24 hours, and [3H]thymidine incorporation and alkaline phosphatase specific activity were determined. Donor-dependent differences were noted in the rate at which defect cells achieved confluence; in general, cells from 7-day tissue divided most rapidly. Seven-day defect cells formed less bone and at a slower rate than was seen in the ceramic cubes containing samples from day 84. Cells derived enzymatically behaved similarly to those from explant cultures. Ceramic cubes contained fibrous connective tissue, cartilage, bone, and fat, indicating that multipotent cells were present. Stimulation of [3H]thymidine incorporation in response to transforming growth factor-beta1 was donor dependent and variable; only two of six separate isolates of cells exposed to it had measurable alkaline phosphatase activity (which was relatively low), and none of the cultures exhibited an increase in response to transforming growth factor-beta1 for 24 hours. This indicates that mesenchymal progenitor cells are present in the healing defect tissue at 7 and 84 days and that the relative proportion of osteochondroprogenitor cells is greater at the later time. The response to transforming growth factor-beta1 is typical of multipotent mesenchymal cells but not of committed chondrocytes or osteoblasts, indicating that these committed and differentiated cells are not present in early stages of healing and suggesting that their differentiation is inhibited in chronic nonunion.