Successful reconstructive surgery with allografts is severely limited by a failure rate of 30 – 40%. Allograft failure is due to nonunion of the graft-host junction. The molecular mechanism by which this occurs is not yet fully elucidated. Using a sheep femoral allograft model, we have investigated the cellular and molecular mechanisms associated with nonunion of bone allografts. Five, from a total of twelve operations, resulted in the development of graft-host nonunion, reflecting a failure rate of 42%. Histological assessment revealed that allograft failure was due to the excessive accumulation of and resorption by, osteoclasts (Ocs) on the surface of the bone allograft. Three distinct layers, lying adjacent to the allograft bone surface, in the nonunion groups, were identified. The outer fibroblastic layer contained abundant fibroblasts and connective tissue. Underlying this layer were synovial-like cells and some multinuclear giant cells. The third layer, opposing the bone surface, consisted of Ocs and round mononuclear cells. Histomorphometric analysis showed that allograft unions, featured a large amount of newly formed bone on the surface, (OS/BS = 47.81%) with a small proportion of eroded surface (ES/BS = 20.59%). The number of osteoclasts associated with the allograft bone surface were few (Oc/B.Pm = 1.7190/mm) and activity (ES/BS = 46.68%) of Ocs with a reduced amount of new bone formation (OS = 6.35%). Both calcitonin receptor and H+ATPase mRNA, characteristically expressed by Ocs, were localised to the multinuclear giant cells, indicating that they were Ocs. Synovial-like cells in the histological layer above the Ocs, expressed gene transcript for the Osteoprotegrin Ligand (OPGL), a membrane bound factor that is critical for the induction of Oc activity and osteoclastogenesis. In conclusion, these findings suggest that failure of bone allografts is partially due to excessive resorption by host Ocs, accompanied by reduced bone formation. The production of OPGL by synovial-like cells, may be responsible for the recruitment and generation of Ocs.