Insoluble bone gelatin with inclusions of insoluble noncollagenous protein produces new bone when implanted in muscle in allogeneic rats. The implanted residue provides the milieu for expression of bone morphogenetic potential of migratory mesenchymal cells. Neutral buffer solutions activate endogenous enzymes that degrade components essential for cell interactions and differentiation of bone. Chloroform-methanol either denatures or extracts constituents responsible for degradation. Insoluble bone gelatin produces new bone after extraction at 2 degrees with neutral salts, 0.5 M EDTA, 0.1 M Tris.HCl, 4 M urea, 0.5 M hydroxylamine, and 10 M KCNS, as well as after limited digestion with pepsin or collagenase, but not after extraction with 5 M guanidine, 7 M urea, water saturated with phenol, or after alkali hydrolysis with 0.1 N NaOH. The specific activity of cell populations interacting with insoluble bone gelatin suggests that a chemical bond between collagen and a noncollagenous protein or part of a protein, cleaved by a neutral proteinase, controls the bone morphogenetic reaction.