1. The present study is an attempt to analyse and apportion significance to the role of inductive mechanisms in bone transplantation. 2. The experimental model used in the present work is that of the composite homograftautograft of cancellous bone previously described (Burwell 1964a). 3. Iliac bone was removed from hooded rats and washed free from its marrow. The bone was then treated by various physical and chemical methods (some of which have been used by other workers to prepare bank bone), namely freezing (-20 degrees Centigrade, -79 degrees Centigrade, -196 degrees Centigrade); freeze-drying (without sterilisation, sterilisation with high energy radiation, sterilisation with ß-propiolactone); decalcification (with E.D.T.A.); irradiation (in the frozen state at a dose of 4 million rads); boiling in water; immersion in merthiolate solution; extraction of organic components with ethylenediamine: and calcining at 660 degrees Centigrade. The treated bone was then impregnated with fresh autologous marrow procured from the femoral shaft of the Wistar rat into which the treated composite graft was to be implanted. The grafts were inserted intramuscularly and removed for study after two, six and twelve weeks. 4. After fixation, serial sectioning and staining, each graft was examined microscopically, and the proportion of new bone/grafted bone scored using an arbitrary scale (0-4). The mean score (and the standard error of the mean score) was then plotted for each treated composite graft and also for several types of fresh cancellous bone grafts. 5. It was found (Fig. 2) that the various treated composite grafts formed a spectrum of bone-forming capacities–the maximum scores being attained by the frozen and freeze-dried composite grafts, the lowest scores by the "deproteinised" composite grafts. 6. The reasons for these differences are discussed. It is concluded that cancellous bone, after transplantation, has the property to induce and promote osteogenesis in marrow; moreover, that this property is contained in the organic components of bone. 7. From the standpoint of inductive mechanisms, cancellous bone treated by freezing or freeze-drying seems to be the most suitable devitalised bone for grafting purposes; bone which has been boiled or merthiolated less suitable; and "deproteinised" bone the least suitable. 8. Freeze-dried bone sterilised physically (by high energy radiation) or chemically (by ß-propiolactone) did not form significantly less new bone than did freeze-dried bone which had not been sterilised. 9. Remodelling mechanisms in bone transplantation are briefly discussed and attention drawn to the deficiencies of present knowledge. The quantitative studies of other workers have indicated that freeze-dried bone may be more rapidly remodelled than is frozen bone. 10. The importance of fresh red marrow in promoting osteogenesis in bone transplantation and in the healing of certain fractures, is emphasised. It seems likely that the interrelationship of bone and marrow revealed by experiment has wider significance not only in health and in response to injury but also in causation of certain idiopathic bone disorders.