ABSTRACTSpecific major histocompatibility complex (MHC) class II genes result in a high susceptibility to rheumatoid arthritis (RA), with co‐stimulatory molecules working together with MHC class II during the progression of the disease. To elucidate the involvement of the B7.1 co‐stimulatory molecule in RA, we analyzed the phenotype of B7.1 transgenic (named D1BC) mice and the sequential differentiation of synovial fibroblasts (SFs) by studying the expression of chondrogenic and osteogenic lineage markers together with lineage tracing experiment using B7.1 transgene in vivo. The B7.1 transgene was driven by a collagen type II (CII) promoter and enhancer in the D1BC mouse. A low‐dose of bovine CII (bCII) was used to induce chronic articular inflammation with interstitial pneumonitis. Joint damage was analyzed by histopathological examination and computed tomography. B7.1 was expressed in articular cartilage and SFs of D1BC mice. Chronic inflammatory arthritis in the bCII‐D1BC mouse shared common features with those found in patients with RA, such as pannus formation, bone destruction, osteoporosis, and joint ankylosis. A subpopulation of SFs (Runx2+, Sox9+, Col10a1+, Osx+, and CX−) in the pannus was classified as osteochondrogenic lineage rather than mesenchymal stromal lineage. These cells underwent differentiation into osteogenic lineage via hypertrophic chondrocytes at the end of the chronic phase. The ectopic expression of B7.1 in chondrocytes and SFs leads to an increased susceptibility to chronic inflammatory arthritis and subsequent new bone formation, reminiscent of ankylosis. The regulation of cartilage remodeling in pannus tissue is an important consideration in the treatment of RA. © 2018 American Society for Bone and Mineral Research.