Step 1: Mesenchymal cells (stem cells) cluster at a site (ossification center) within the dermis (skin layers) and secrete bone matrix (collagen + Ca +2). These cells will become osteoblasts.
Step 2: Bone grows outward in spicules which will become the struts of spongy bone. Vessels grow into area.
Step 3: Osteoblasts at the outer edge become less active and become osteocytes.