Abstract: Cancellous bone is modelled as a transversely isotropic, liquid saturated porous solid based on experimental observation. The finite element formulation for dynamic response of cancellous bone is set up on the basis of Galerkin weighted residual method. Introducing the ratio of pressure p to penalty parameter β in the continuity equation, a penalty finite element formulation is established which can eliminate the pressure term in governing equations. Thus, the coupling effect between the solid phase and the fluid phase in cancellous bone is studied when the tissue is subjected to impact loading. Computational results show that the reciprocity between the solid osseous and the marrow in the cavity results from the coupling effects between the solid and the fluid. It is found that the cancellous bone is characterized by its viscoelasticity and energy dissipation.