Collagenase production by chondrocytes appears to play a major role in the development of osteoarthritis. Although the mechanisms regulating collagenase production by chondrocytes are not known, incubation of bovine chondrocytes in serum markedly decreases collagenase production. Since serum has been demonstrated to increase levels of phosphotyrosine (P-Tyr) in several cell types, we determined the effect of altering intracellular levels of P-Tyr on collagenase production. Both orthovanadate, a potent inhibitor of tyrosine phosphatases, and serum caused a marked increase in tyrosine phosphorylation. The increase in P-Tyr was associated with a decrease in the production of collagenase, suggesting that two processes may be linked. Orthovanadate caused an increase in P-Tyr in the absence of serum, suggesting that P-Tyr levels in resting chondrocytes are regulated through activity of both tyrosine kinases and phosphatases. Orthovanadate and serum induced a synergistic increase in P-Tyr levels, suggesting that serum functions through increasing kinase activity rather than decreasing phosphatase activity. In the absence of serum, concentrations of orthovanadate which maximally inhibited collagenase production primarily increased phosphorylation of a 36 kDa protein, suggesting that the phosphorylation of this protein may play a major role in regulating collagenase production. Orthovanadate had limited effects on chondrocyte proteoglycan synthesis, morphology or viability in the presence or absence of serum, suggesting that the decrease in collagenase production was not due to non-specific inhibition of protein synthesis or cellular toxicity. Inhibition of tyrosine phosphatases by orthovanadate or activation of tyrosine kinases by addition of serum correlated with the inhibition of collagenase production.