Earlier observations indicated that epithelial cells of urinary bladder, and transformed epithelial cells from human amnion (FL), epidermal carcinoma (HeLa), etc. can induce ectopic endochondral bone formation when implanted into the skeletal muscle of immunosuppressed or autologous animals. Such epithelial cells are associated with little matrix. Bone-inducing activity was also demonstrated in cultured osteosarcoma cells of murine and human origin or extracts thereof, and it is notable that these bone-inducing osteosarcoma cells grow in vitro with little matrix production. Finally, electron microscopy of in vitro cartilage induction showed that decalcified rodent bone that had been extensively extracted to remove cells still contained devitalized cells and cell fragments some of which made contact with inducible, cartilage-forming mesenchymal cells that had migrated in from cocultured muscle. Suggestions: These observations suggest that: 1) the bone-inducing agent(s) of both epithelial and mesenchymal cells may reside mostly in cells rather than matrix. Thus it may be premature to assume that bone "matrix" is the major source of bone-inducing agent in decalcified bone until the osteoinductive activity of residual bone cells has been assessed; and 2) that the osteoinductive agent, whether residing in epithelial cells or bone cells, may be the same or a similar factor operating through the same mechanism.