AbstractImplantation of demineralized bone (DB) in the form of powder or intact segments in extra skeletal sites stimulates new bone formation. Urist and co‐workers presented substantial evidence that there is a noncollagenous protein that has the ability to induce bone formation. One aim of this study was to trace the process of bone formation when DB, in the form of perforated rectangular plates, is implanted subcutaneously in 2‐month‐old rats. A second objective was to determine whether cartilage cells play a role in the formation of bone in this model. Various DB plates with 0.25 mm diameter holes were implanted subcutaneously for 1–4 weeks in rats. One week after implantation, DB plates were covered by vascularized connective tissue that invaded the perforations. Aggregates of chondrocytes were observed within the holes and on periosteal surfaces in only a few specimens. Further cartilage proliferation was not observed, and by the 2nd week there was no evidence of endochondral bone formation. Where these cartilage‐like cells were present, a thin layer of mineral was deposited around them; resorption and fibrous tissue infiltration followed. This aborted form of endochondral calcification was not followed spatially by bone formation. Patent vascularized channels were invaded by alkaline phosphatase‐positive mononuclear cells and fibroblasts, and became enlarged by the enzymatic action of macrophages. The next step involved the calcification of DB plates adjacent to the wide spaces. Osteoclasts now appeared leading to the resorption of this recalcified matrix. The eroded and now enlarged lacunar surfaces were lined by newly formed bone and osteoblasts. This process continued so that, at the end of 4 weeks following implantation, the original DB plates were replaced by trabecular bone. Biochemical data on calcium and alkaline phosphatase levels in the implants paralleled the morphological o