We established the clonal mesenchymal cell line, GFP-C3 (C3), which differentiates into osteoblasts in response to BMP-2 from calvariae of newborn green fluorescence protein (GFP) transgenic mice. This cell line cultured with control medium expressed low levels of alkaline phosphatase (ALP) activity and osterix mRNA and undetectable ALP and osteocalcin mRNA. Incubation of these cells with rhBMP-2 increased ALP activity dose-dependently and induced substantial levels of ALP, osteocalcin and osterix mRNA expression. C3 cells infected with adenovirus vector encoding BMP-2 (AdBMP-2) or Runx2 (AdRunx2) showed greatly increased ALP mRNA expression in a time-dependent fashion. Transduction with AdRunx2-induced expression of ALP and osteocalcin mRNA, but not osterix mRNA by day 3. Transduction with AdBMP-2 induced apparent expression of ALP and osterix mRNA by day 1 after transduction, but induced only weak expression of osteocalcin mRNA day 3 after transduction. Transplantation of C3 cells transduced with AdBMP-2 into back subfascia in wild-type mice with a complex of poly-d,l-lactic-co-glycolic acid/gelatin sponge (PGS) generated ectopic bone formation involving GFP-positive osteoblasts and osteocytes 2 weeks after transplantation. C3 cells transduced with AdRunx2 or AdLacZ failed to induce ectopic bone formation. Transplantation of C3 cells transduced with AdBMP-2 into craniotomy defects in wild-type mice using PGS as a carrier induced bone formation 2 weeks after transplantation, and replaced defects 4 weeks after transplantation. C3 cells transduced with AdRunx2 failed to induce bone repair after transplantation into craniotomy defects. These results indicate that C3 cells retain differentiation potential into osteoblasts in response to BMP-2. They are useful tools for analyzing the process of osteoblast differentiation in vivo after transplantation.