Bone inducing agent (BIA) isolated from Saos-2 human osteosarcoma cells was added to an artificial bone substitute composed of 980 degrees C-heated carbonate apatite (CAp) and Type I atelocollagen (AtCol) extracted from bovine tail skins (88/12 in wt/wt %), and a CAp-AtCol-BIA substitute was prepared as an osteoinductive bone substitute. Rat calvaria osteoblasts treated by the isolated BIA demonstrated significantly increased alkaline phosphatase (ALP) activity after 3 days (p < 0.05). In vitro cell attachment and proliferation and ALP activity were investigated for the bone substitute combined with BIA. Osteoblasts cultured onto the surface of the CAp-AtCol-BIA substitute demonstrated remarkable morphological changes such as radial spreading, flattening, and projecting filopodia after 5 days. In comparison with the substitute without BIA, osteoblasts grown in the BIA-combined CAp-AtCol substitute expressed significantly increased proliferation and ALP activity, respectively (p < 0.05). Both the substitutes combined with and without BIA were implanted into artificial defects created in rabbit radii. After 4 weeks, the CAp-AtCol-BIA substitute implanted lesion was completely replaced by regenerated host bone in radiological observation whereas the substitute without BIA was partially resorbed. No histologic abnormalities appeared in the substitute either with or without BIA.