Processed bovine cancellous bone (PBCB) is an attractive material for tissue engineering of bone. It is biocompatible, osteoconductive, nonimmunogenic, and porous and its biomechanical properties are close to those of native bone. In this study, differentiation of primary rat osteoblasts (rOBs) incubated on PBCB was investigated in vitro. rOBs were isolated and expanded in two-dimensional culture. Expanded rOBs were seeded into PBCB disks and cultured either in basal medium (BM) or differentiation medium (DM) containing ascorbic acid, beta-glycerol phosphate, and dexamethasone. Alkaline phosphatase (ALP) activity and RNA expression of ALP, bone sialoprotein (BSP), collagen type I (COL1), osteocalcin (OC), and osteopontin (OPN) were assessed by chemiluminescence assay and quantitative real-time RT-PCR over 14 days. Histologic analysis was performed on day 14. ALP increased over the observation period independent of stimulation. OPN and BSP expression was significantly higher in the DM group whereas COL1 and OC expression was significantly higher in the BM group. Matrix calcification was detectable only in the DM group by von Kossa stain. The observed expression patterns suggest a physiological response of rOBs to the differentiation stimulus. PBCB is a suitable matrix for in vitro differentiation of osteoblasts. Cell-seeded PBCB is a potential osteogenic construct for in vivo application.