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Aims. Exosomes (exo) are involved in the progression of osteoarthritis (OA). This study aimed to investigate the function of dysfunctional chondrocyte-derived exo (DC-exo) on OA in rats and rat macrophages. Methods. Rat-derived chondrocytes were isolated, and DCs induced with interleukin (IL)-1β were used for exo isolation. Rats with OA (n = 36) or macrophages were treated with DC-exo or phosphate-buffered saline (PBS). Macrophage polarization and autophagy, and degradation and chondrocyte activity of cartilage tissues, were examined. RNA sequencing was used to detect genes differentially expressed in DC-exo, followed by RNA pull-down and ribonucleoprotein immunoprecipitation (RIP). Long non-coding RNA osteoarthritis non-coding transcript (OANCT) and phosphoinositide-3-kinase regulatory subunit 5 (PIK3R5) were depleted in DC-exo-treated macrophages and OA rats, in order to observe macrophage polarization and cartilage degradation. The PI3K/AKT/mammalian target of rapamycin (mTOR) pathway activity in cells and tissues was measured using western blot. Results. DC-exo inhibited macrophage autophagy (p = 0.002) and promoted M1 macrophage polarization (p = 0.002). DC-exo at 20 μg/ml induced collagen degradation (p < 0.001) and inflammatory cell infiltration (p = 0.023) in rats. OANCT was elevated in DC (p < 0.001) and in cartilage tissues of OA patients (p < 0.001), and positively correlated with patients’ Kellgren-Lawrence grade (p < 0.001). PIK3R5 was increased in DC-exo-treated cartilage tissues (p < 0.001), and OANCT bound to fat mass and obesity-associated protein (FTO) (p < 0.001). FTO bound to PIK3R5 (p < 0.001) to inhibit the stability of PIK3R5 messenger RNA (mRNA) (p < 0.001) and disrupt the PI3K/AKT/mTOR pathway (p < 0.001). Conclusion. Exosomal OANCT from DC could bind to FTO protein, thereby maintaining the mRNA stability of PIK3R5, further activating the PI3K/AKT/mTOR pathway to exacerbate OA. Cite this article: Bone Joint Res 2022;11(9):652–668