FL, HeLa and other non-murine epithelial cells are capable of inducing chondroosseous differentiation when brought into contact with mouse thigh mesenchymal cells. Immunosuppression as produced by cortisone or mouse antilymphocyte serum is required to prevent rejection and to allow growth of the foreign epithelial cells. Cartilage appears within 7 days and bone within 9 days following epithelial cell injection. Electron microscopic studies indicate that the induced cartilage and bone is normal in basic strucutre, and that calcification is mediated by extracellular matrix vesicles. Various forms of mechanical and chemical injury have consistently failed to stimulate cartilage or bone formation in the mouse thigh. Explantation of preosseous thigh tumors to mouse brain allows continued growth of human and mouse cells with development of cartilage or bone in 67 per cent of implants. Microscopy indicates cartilage and bone formation by many mesenchymal cells which are not in direct contact with epithelium. To account for this, two mechanisms of bone induction are envisioned: (1) short-range diffusion of inductive substance(s) and/or (2) transfer of the inductive stimulus by direct surface contact from epithelial cell to mesenchymal cell to mesenchymal cell and so on.