Background: Bone disorders (including osteoporosis, loosening of a prosthesis, and bone infections) are of great concern to the medical community and are difficult to cure. Therapies are available to treat such diseases, but all have drawbacks and are not specifically targeted to the site of disease. Chitosan is widely used in the biomedical community, including for orthopedic applications. The aim of the present study was to coat chitosan onto iron oxide nanoparticles and to determine its effect on the proliferation and differentiation of osteoblasts. Methods: Nanoparticles were characterized using transmission electron microscopy, dynamic light scattering, x-ray diffraction, zeta potential, and vibrating sample magnetometry. Uptake of nanoparticles by osteoblasts was studied by transmission electron microscopy and Prussian blue staining. Viability and proliferation of osteoblasts were measured in the presence of uncoated iron oxide magnetic nanoparticles or those coated with chitosan. Lactate dehydrogenase, alkaline phosphatase, total protein synthesis, and extracellular calcium deposition was studied in the presence of the nanoparticles. Results: Chitosan-coated iron oxide nanoparticles enhanced osteoblast proliferation, decreased cell membrane damage, and promoted cell differentiation, as indicated by an increase in alkaline phosphatase and extracellular calcium deposition. Chitosan-coated iron oxide nanoparticles showed good compatibility with osteoblasts. Conclusion: Further research is necessary to optimize magnetic nanoparticles for the treatment of bone disease.