Transplantation of collagenous matrix from the rat diaphyseal bone to subcutaneous sites resulted in new bone formation by an endochondral sequence. Functional bone marrow develops within the newly formed ossicle. On day 1, the implanted matrix was a discrete conglomerate with fibrin clot and polymorphonuclear leukocytes. By day 3, the leukocytes disappeared, and this event was followed by migration and close apposition of fibroblast cell surface to the collagenous matrix. This initial matrix-membrane interaction culminated in differentiation of fibroblasts to chondroblasts and osteoblasts. The calcification of the hypertrophied chondrocytes and new bone formation were correlated with increased alkaline phosphatase activity and 4sCa incorporation. The ingrowth of capillaries on day 9 resulted in chondrolysis and osteogenesis. Further remodelling of bony trabeculae by osteoclasts resulted in an ossicle of cancellous bone. This was followed by emergence of extravascular islands of hemocytoblasts and their differentiation into functional bone marrow with erythropoietic and granulopoietic elements and megakaryocytes in the ossicle. The onset and maintenance of erythropoiesis in the induced bone marrow were monitored by 5'Fe incorporation into protein-bound heme. These findings imply a role for extracellular collagenous matrix in cell differentiation.There is growing knowledge about the intracellular molecules involved in cell differentiation (8). However, information pertaining to the possible role of extracellular matrix macromolecules such as collagen and proteoglycans has lagged (20). A characteristic feature of multicellular metazoa is the presence of extracellular matrix. In skeletal and dental tissues, extracellular matrices are most prominent and may provide important clues to their role.On contact with demineralized collagenous matrices of bone and tooth, responding fibroblasts (mesenchymal cells) show an alteration of gene expression which results in emergence of new phenotypes (18,19,22,32,33). Simple techniques to study this phenomenon were developed and the temporal sequence of events were delineated (22).