Subcutaneous implantation of demineralized bone matrix (DBM) from rat initiates a sequence of developmental events that results in endochondral bone formation. This investigation examined the modification of the osteoinductive potential of DBM during the initial stages of this developmental cascade. Diffusion chambers (DC), constructed with filters of known pore size, permitting or excluding cells from entering the chambers, and containing DBM were subcutaneously implanted into Long-Evans male rats for specific time periods (1-7 days). DC were recovered and the osteoinductive potential of the matrix from these chambers was then tested by subcutaneous implantation and assaying the resulting day 11 plaque tissue enzymatically for alkaline phosphatase activity, and histologically for evidence of chondrogenesis and osteogenesis. The possible modification of DBM by local systemic factors (enzymatic degradation) or contact by polymorphonuclear leukocytes (PMNs) was also investigated. We have concluded from this study that the osteoinductive potential of DBM has a half-life of 5-7 days following implantation and although the enzymes collagenase, elastase, and trypsin abolished this activity, pepsin significantly enhanced it. Culture of PMNs with matrix prior to its implantation appeared to have little effect. Furthermore, during the initial stages of matrix-induced endochondral bone formation, DBM serves as both the instructive inducer and permissive substratum required in this process.