Cultured FL human amnion cells injected intramuscularly into cortisone-conditioned mice proliferate to form discrete nodules which become surrounded by fibroblasts. Within 12 days, fibroblastic zones differentiate into cartilage which calcifies to form bone. Experiments were conducted to test the hypothesis that FL cells behave as an inductor of bone formation. In the electron microscope, FL cells were readily distinguished from surrounding fibroblasts. Transitional forms between the two cell types were not recognized. Stains for acid mucopolysaccharides emphasized the sharp boundary between metachromatic fibroblastic and cartilaginous zones and nonmetachromatic FL cells. 35S was taken up preferentially by fibroblasts and chondrocytes and then deposited extracellularly in a manner suggesting active secretion of sulfated mucopolysaccharides. FL cells showed negligible 35S utilization and secretion. FL cells, labeled in vitro with thymidine-3H, were injected and followed radioautographically, during bone formation. Nuclear label of injected FL cells did not appear in adjacent fibroblasts in quantities sufficient to indicate origin of the latter from FL cells. The minimal fibroblast nuclear labeling seen may represent reutilization of label from necrotic FL cells. It is suggested that FL cells injected into the mouse thigh induced cartilage and bone formation by host fibroblasts.