Cartilage-derived morphogenetic proteins-1 and -2 (CDMP-1 and CDMP-2) are members of the bone morphogenetic protein (BMP) family, which play important roles in embryonic skeletal development. We studied the biological activities of recombinant CDMP-1 and CDMP-2 in chondrogenic and osteogenic differentiation and investigated their binding properties to type I and type II serine/threonine kinase receptors. In vivo, CDMP-1 and CDMP-2 were capable of inducing dose-dependently de novo cartilage and bone formation in an ectopic implantation assay. In vitro studies using primary chondrocyte cultures showed that both CDMP-1 and CDMP-2 stimulated equally de novo synthesis of proteoglycan aggrecan in a concentration-dependent manner. This activity was equipotent when compared with osteogenic protein-1 (OP-1). In contrast, CDMPs were less stimulatory than OP-1 in osteogenic differentiation as evaluated by alkaline phosphatase activity and expression levels of bone markers in ATDC5, ROB-C26, and MC3T3-E1 cells. CDMP-2 was the least osteogenic in these assays. Receptor binding studies of CDMP-1 and CDMP-2 revealed that both have affinity for the BMP receptor type IB (BMPR-IB) and BMPR-II, and weakly for BMPR-IA. Moreover, using a promoter/reporter construct, transcriptional activation signal was transduced by BMPR-IB in the presence of BMPR-II upon CDMP-1 and CDMP-2 binding. Our data show that distinct members of the BMP family differentially regulate the progression in the osteogenic lineage, and this may be due to their selective affinity for specific receptor complexes.