Freeze-drying is considered to be the best technique for allograft preparation and storage. This method is, however, unsuitable for use in developing countries due to high costs. Ethylene oxide sterilization is still controversial because of its effect on osteoinductive capacity. This study involved setting up a bone bank for the first time. Cancellous bone collected from 40 patients was cleaned thoroughly, chemically processed, and sterilized with ethylene oxide gas and stored doubly packed. The grafts were implanted in 11 patients with 14 nonunions. Patients were followed up clinically and radiologically. Thirteen sites were united at the end of 12 months, taking an average of 44.8 weeks to unite. Allograft was also used in 8 benign bone lesions, which showed incorporation of the graft by 29 weeks. This study shows cancellous allograft is suitable for packing cavities in the treatment of benign bone lesions and in treatment of nonunion. There was one deep infection. The low infection rate confirms the efficacy of ethylene oxide as a reliable option for sterilization of bone allograft, and it is also cost effective.