The localization of types I, II, and III collagens during bone matrix-induced sequential differentiation of cartilage, bone, and bone marrow was studied by specific immunofluorescence. Subcutaneous transplantation of coarse powders of demineralized rat bone matrix into allogeneic recipients resulted in new bone formation. After a transient appearance of polymorphonuclear leukocytes in the implant, fibroblasts appeared in close continguity to the matrix on day 3. Type III collagen was then localized as a fine network around the invading fibroblasts. On days 4--6 smaller amounts of type I were also detected around these proliferating cells. With the onset of chondrogenesis, type II collagen was detected in the cartilage matrix on day 6 and persisted until the early stages of bone formation. Vascular invasion of the implant was accompanied by osteogenesis on day 10. Type I collagen was demonstrated in the newly deposited bone matrix coating the surfaces of cartilage spicules and particles of implanted bone powder. On day 17 and thereafter, type III collagen was localized as a fibrous array around nests of hematopoietic cells.