Formation of advanced glycation end products (AGEs) in extracellular matrix (ECM) is implicated in the development of chronic diabetic complications. However, the involvement of AGEs in diabetic bone disease has not been well established. We have examined whether AGEs are increased in the bone collagen of streptozotocin‐induced diabetic rats in vivo and whether glycation of type I collagen affects the functions of osteoblastic cells in vitro. During 12 weeks of observation, AGEs in collagen extracted from the tibiae of diabetic rats increased in a time‐dependent manner and were significantly higher than controls at every time point. In vitro, the incubation of collagen with glucose‐6‐phosphate resulted in a time‐dependent increase of AGEs. When osteoblastic cells isolated from fetal rat calvaria were cultured on AGE‐modified type I collagen, it dose‐dependently inhibited phenotypic expressions of osteoblasts. Among osteoblastic parameters, nodule formation was the most sensitive, being inhibited by ∼70% by the glycation of collagen for only 1 week. Alkaline phosphatase activity and osteocalcin secretion were inhibited by 20–30% and 15–70%, respectively, by the glycation of collagen for 1–5 weeks. These results indicate that AGE‐modified collagen affects osteoblastic cell differentiation and function in vitro and suggest that similar changes occurring in vivo may contribute to diabetic osteopenia.