The present report describes the first in a series of studies designed to identify the factor or factors responsible for eliciting osteoclast differentiation. Particles of mineralized and demineralized bone, hydroxyapatite (HA), and eggshell were grafted onto the chorioallantoic membranes (CAMs) of chick embryos. After 3 of 6 days, portions of CAMs with associated grafts were harvested, processed for light and electron microscopy, and examined for the presence of multinucleated giant cells with the morphological characteristics of osteoclasts. Light microscopic examination revealed that, within only 3 days, many particles of mineralized materials had become surrounded or engulfed by multinucleated giant cells. Ultrastructurally, all such cells possessed a vacuolated and mitochondria-enriched cytoplasm, but they differed in the nature of the contacts formed at the cell-particle interface. With eggshell, the cells developed filopodia but lacked clear zones and ruffled membranes. With HA, clear zones were evident but cytoplasmic extensions and membrane ruffling were absent. Implants of mineralized bone, however, elicited the formation of giant cells with prominent clear zones and ruffling of the plasma membrane like that observed in bonafide osteoclasts. In contrast, grafts of demineralized bone did not evoke giant cell formation but rather recruited two cell types morphologically akin to either fibroblasts or macrophages. We conclude that the factor(s) responsible for osteoclast differentiation resides specifically within bone matrix and is intimately associated with the mineral phase. Further, in response to such a factor(s), osteoclast differentiation can occur ectopically, outside of the developing vertebrate body.