To repair full-thickness articular cartilage defects in rabbit knees, we transplanted periosteal cells in a fibrin gel and determined the influence of transforming growth factor beta (TGF-beta) in vitro. Alginate served as a temporary supportive matrix component and was removed prior to transplantation. The defects were analyzed macroscopically, histologically, and electron microscopically, and evaluated with a semi-quantitative score system. Periosteal cell transplants showed a chondrogenic differentiation, which results in the development of embryonic-like cartilage tissue after 4 weeks and complete resurfacing of the patellar groove after 12 weeks. In the control groups, no repair was observed. Under the influence of TGF-beta1 we observed a reduction of the cartilage layer, whereas the osteochondral integration and the zonal architecture were improved. Periosteal cell-beads are stable cartilage transplants and have stiffness and elasticity enough for easy and sufficient transplant fixation. Further investigations are necessary to optimize the application of TGF-beta1 for cartilage repair.