The involvement of activin and follistatin, an activin-binding protein, in endochondral bone development was examined by sc implantation of demineralized bone matrix in rats. Immunoreactive follistatin was localized in proliferating chondrocytes and round osteoblasts, whereas it was not detected in hypertrophic chondrocytes and osteoblasts surrounding bone marrow. Western blot analysis also revealed that immunoreactive follistatin was higher during the initial stages of chondrogenesis (day 5) and osteogenesis (days 11 and 14) and lower during the conversion from cartilage to bone (day 9). These results suggest that follistatin is produced by proliferating cells, and the expression decreases with differentiation of the cells. Implants injected with follistatin on days 9 and 10 contained lower calcium levels on day 14 than those injected with rat albumin. Furthermore, the follistatin-injected implants were still mainly composed of cartilage, suggesting that the disappearance of follistatin is necessary for the conversion of cartilage to bone. In contrast, immunoreactive activin beta A (55-60 kDa) was continuously detected in implants on days 7-14. The content of C propeptide of type II procollagen was increased and cartilageous area was enlarged on day 7 by activin A injections on days 5 and 6, suggesting a chondrogenic effect of activin in the initial stage of cartilage formation. These results indicate that proliferating chondrocytes and round osteoblasts produce follistatin, and that the activity of activin is regulated by changes in the expression of follistatin at the stages of chondrogenesis and transition from cartilage to bone.