The identity of the cells that form the periosteum during development is controversial with current dogma suggesting these are derived from a Sox9-positive progenitor. Herein, we characterize a newly created Prrx1eGFP reporter transgenic mouse line during limb formation and postnatally. Interestingly, in the embryo Prrx1eGFP-labeled cells become restricted around the Sox9-positive cartilage anlage without themselves becoming Sox9-positive. In the adult, the Prrx1eGFP transgene live labels a subpopulation of cells within the periosteum that are enriched at specific sites, and this population is diminished in aged mice. The green fluorescent protein (GFP)-labeled subpopulation can be isolated using fluorescence-activated cell sorting (FACS) and represents approximately 8% of all isolated periosteal cells. The GFP-labeled subpopulation is significantly more osteogenic than unlabeled, GFP-negative periosteal cells. In addition, the osteogenic and chondrogenic capacity of periosteal cells in vitro can be extended with the addition of fibroblast growth factor (FGF) to the expansion media. We provide evidence to suggest that osteoblasts contributing to cortical bone formation in the embryo originate from Prrx1eGFP-positive cells within the perichondrium, which possibly piggyback on invading vascular cells and secrete new bone matrix. In summary, the Prrx1eGFP mouse is a powerful tool to visualize and isolate periosteal cells and to quantify their properties in the embryo and adult.