We studied the endochondral ossification that occurs during the transition of soft to hard callus during fracture healing in the rabbit. During this process, parts of the cartilaginous soft callus are invaded by capillaries, and new bone is laid down onto the central unresorbed cartilage struts. We found that the chondrocytes within these cartilage struts changed phenotype and became bone-forming cells which directly replaced the central cartilage core with bone matrix. We have termed this bone "lacunar" bone to distinguish it from the "vascular" bone laid down by osteoblasts. With time the lacunar bone spread beyond the confines of the lacunae and gradually replaced all the cartilage matrix that was originally present in the early endochondral spicules. The lacunar bone could still be distinguished from the vascular bone as follows: (1) it was woven bone, whereas vascular bone was lamellar bone; (2) it contained acid phosphatase activity, whereas vascular bone did not; and (3) it had strong antigenicity for bone sialoprotein, whereas this noncollagenous protein was undetectable in vascular bone. Eventually the hard callus was resorbed and remodeled, but at an interim period of endochondral ossification the direct replacement of cartilaginous callus by the formation of lacunar bone is a rapid mechanism by which the mechanical strength of fracture callus is increased.