An in situ bio-oil upgrading process employing two circulating fluidized beds (CFBs) in series is proposed. One CFB allows the rapid pyrolysis of biomass and the other CFB facilitates bio-oil upgrading in the presence of a catalyst. In bio-oil upgrading CFBs, bio-oil is deoxygenated with hydrogen which is known as the hydrodeoxygenation (HDO) process. A system analysis was carried out on this process with respect to heat and mass balance to optimize the process efficiency and operating conditions. The product distribution of the pyrolysis CFB was experimentally obtained using a fluidized-bed reactor. According to the experimental results, a pyrolysis temperature of 823 K produced the highest bio-oil yield of 66 mass%. Based on the analysis of the bio-oil upgrading process, the maximum energy conversion from biomass to bio-oil was determined to be as high as 70% with respect to the biomass lower heating value (LHV). The energy conversion was strongly affected by the amount of hydrogen that was introduced to the bio-oil upgrading CFB. The bio-oil upgrading CFB produced a large amount of heat owing to the exothermic reaction of the HDO process. Heat elimination from the bio-oil upgrading CFB was required to maintain the catalyst temperature. It was found that the thermal utilization of unreacted hydrogen and an increased bio-oil yield during pyrolysis are required to further improve the energy conversion.