This paper examines the fate of decalcified allografts (homografts) of iliac cancellous bone impregnated with autologous red marrow and implanted intermuscularly into the anterior abdominal wall of rabbits. In contrast to the findings of Urist and other workers that cortical bone decalcified with hydrochloric acid (HCl) and then freeze-dried is inductive to new bone formation in various heterotopic sites, evidence is presented that iliac bone decalcified by HCl and grafted alone to a muscular site is itself very weakly inductive to bone formation. However, when combined with autologous bone marrow the HCl-decalcified bone provides a better substrate for bone formation by marrow cells than does either undecalcified iliac bone, or iliac bone decalcified with ethylene-diamine-tetra-acetic acid. The freezing or freeze-drying of decalcified bone does not affect new bone formation when implanted alone or with autologous marrow. The differences between the cortical and cancellous bone as inductive substrates for osteogenesis are discussed and the interrelationship of bone and marrow in combined bone grafts are re-evaluated.