The calpain-calpastatin system, which consists of calpains I and II (two ubiquitously distributed calcium-activated papain-like cysteine proteases), as well as calpastatin (the endogenous calpain inhibitor), plays an important role in cell proliferation and differentiation in many tissues. However, its contribution to the regulation of osteoprogenitor or pluripotent stem cell proliferation and differentiation into osteoblasts remains poorly defined. In these studies, rat pluripotent mesodermal cells (ROB-C26) and mouse MC3T3-E1 preosteoblasts were induced to differentiate into osteoblasts by long-term culture or in response to bone morphogenetic protein (BMP). The occurrence and distribution of calpain-calpastatin system proteins were determined by immunofluorescent microscopy, measurement of calcium-dependent proteolytic activity, and Western blotting. Treatment of intact MC3T3-E1 cells with an irreversible, membrane-permeable cysteine protease inhibitor attenuated proliferation and alkaline phosphatase upregulation under differentiation-enhancing conditions. Calpain II activity increased during differentiation of MC3T3-E1 cells in postconfluent culture. When ROB-C26 cells were maintained in long-term culture, neutral protease, calpain I, and calpain II activities increased 2- to 3-fold in the absence of BMP. In the presence of partially purified native BMP, neutral protease and calpain I activities also increased similarly, but calpain II activity increased by 10-fold in 3 days. The maximal increase in alkaline phosphatase occurred 4 to 11 days after the calpain II activity had peaked. Induction of differentiation in long-term MC3T3-E1 cultures was associated with higher calpain II and 70- and 110-kDa calpastatin protein levels and lower 17-kDa calpastatin degradation product levels. In conclusion, cysteine protease activity is essential for preosteoblastic proliferation and differentiation. The calpain-calpastatin system is regulated during osteoprogenitor proliferation and differentiation, as it is in other cells, and bone morphogenetic protein is a specific regulator of calpain II.