Bone matrix is a repository of growth and differentiation factors as demonstrated by the induction of local cartilage and bone formation in rats. The bone inductive activity, termed osteogenin, can be dissociatively extracted, and it was isolated by heparin affinity, hydroxyapatite and molecular sieve chromatography. Osteogenin has been purified to homogeneity from bovine bone matrix and the sequences of several tryptic peptides have been determined. The sequences were similar to portions of the amino acid sequence deduced from the cDNA clone of bone morphogenetic protein-3 (BMP-3). The carboxyl-terminal quarter of osteogenin has sequence identity to the corresponding regions of two related proteins BMP-2A and BMP-2B. The bone inductive proteins are members of the TGF-beta superfamily, by virtue of the location of the highly conserved cysteines in their carboxyl-terminal region. Osteogenin and related BMPs initiate cartilage and bone formation in vivo. The study of the mechanism of action of these proteins will add considerable new information on the molecular signals controlling endochondral bone formation. In vitro data indicate that osteogenin stimulates the expression of the osteogenic and chondrogenic phenotypes. Our results demonstrate their profound influence on proteoglycan synthesis and degradation in bovine cartilage explant cultures. High affinity specific binding sites have been identified in both MC3T3 cells and articular chondrocytes. In vivo experiments demonstrate the efficacy of primate osteogenin in restoring large calvarial defects in adult baboons, establishing a primary role for osteogenin in therapeutic initiation and promotion of osteogenesis.