Prostaglandin E₂ (PGE₂) increases the number of mineralized nodules that form in cultures of rat calvarial (RC) cells. The purpose of our study was to characterize PGE₂‐inducible osteogenic colony forming units (CFU‐Os) by determining their number, the cell populations from which they were released, their specific responsive period to PGE₂, and their proliferating and differentiating characteristics under the stimulation of PGE₂. Limiting dilution analysis was used to determine the number of PGE₂‐inducible CFU‐Os. Sequential digestion of intact rat parietal bones with collagenase isolated 5 subpopulations of RC cells that were used to estimate the cell populations where PGE₂‐inducible CFU‐Os resided. The responsive period of PGE₂‐inducible CFU‐Os to PGE₂ was evaluated by treating cultures of mixed RC cells for all possible combinations of days 1–10, 11–20, and 21–30. PGE₂ effects on proliferation and differentiation of CFU‐Os were evaluated by comparing the DNA synthesis and AP activity in subpopulations I and IV on days 3, 6, and 9. Results showed: (1) PGE₂‐inducible CFU‐Os represent 0.27% of cells in the mixed RC population, (2) the majority of determined and PGE₂‐inducible CFU‐Os were found in the subpopulations released during the 60–100 min digestion periods, (3) the response of PGE₂‐inducible CFU‐Os is limited to the first 10 days of culture, and (4) PGE₂‐stimulated nodule formation is associated with an early increase in DNA synthesis and a sustained increase in alkaline phosphatase activity. We conclude that, functionally, PGE₂‐inducible CFU‐Os are slowly proliferating AP negative cells primarily found in the subpopulations III‐V. PGE₂ stimulates them to proliferate and become AP+, and function as determined CFU‐Os to form mineralized nodules in vitro. © 1996 Wiley‐Liss, Inc.