Circulating progenitor cells are known to home to various organs to repair injured tissues or to routinely replace old cells and maintain tissue integrity. Similarly, circulating progenitor bone cells can possibly home to a bone implant, differentiate, and eventually osteointegrate with the prosthesis. Osteointegration of bone cells with the prosthesis can help to reduce the risk of implant failure due to constant movement between bone tissue and implant surface. In this study, we aim to investigate if immobilized bone morphogenetic protein-2 (BMP2) on chitosan-grafted titanium substrate (Ti-CS-BMP2) will enhance bone marrow-derived mesenchymal stem cell (BMMSC) adhesion onto the substrate surface and further induce their differentiation into osteoblasts. The results show that our Ti-CS-BMP2 substrate is able to retain adsorbed BMP2, and is capable of slow release of this growth factor. Despite the lesser number of BMMSCs initially attached onto the Ti-CS-BMP2 substrates and consequently the lower level of cell proliferation, Ti-CS-BMP2 cells had the highest level of ALP activity. RT-PCR results show that Ti-CS-BMP2 cells had a relatively higher level of transcription activity of Runx2, compared with that of bone cell-derived osteoblasts (BC-OB), an indication that the BMMSCs were actively differentiating into osteoblasts. Finally, alizarin red staining reveals the presence of calcium deposits in the differentiated cells. Hence our Ti-CS-BMP2 substrates possess an osteoconductive effect and can possibly be used to fabricate bone implants that can osteointegrate with host bone tissue.