The glycerophosphodiester phosphodiesterase enzyme family involved in the hydrolysis of glycerophosphodiesters has been characterized in bacteria and recently identified in mammals. Here, we have characterized the activity and function of GDE3, one of the seven mammalian enzymes. GDE3 is up-regulated during osteoblast differentiation and can affect cell morphology. We show that GDE3 is a glycerophosphoinositol (GroPIns) phosphodiesterase that hydrolyzes GroPIns, producing inositol 1-phosphate and glycerol, and thus suggesting specific roles for this enzyme in GroPIns metabolism. Substrate specificity analyses show that wild-type GDE3 selectively hydrolyzes GroPIns over glycerophosphocholine, glycerophosphoethanolamine, and glycerophosphoserine. A single point mutation in the catalytic domain of GDE3 (GDE3R231A) leads to loss of GroPIns enzymatic hydrolysis, identifying an arginine residue crucial for GDE3 activity. After heterologous GDE3 expression in HEK293T cells, phosphodiesterase activity is detected in the extracellular medium, with no effect on the intracellular GroPIns pool. Together with the millimolar concentrations of calcium required for GDE3 activity, this predicts an enzyme topology with an extracellular catalytic domain. Interestingly, GDE3 ectocellular activity is detected in a stable clone from a murine osteoblast cell line, further confirming the activity of GDE3 in a more physiological context. Finally, overexpression of wild-type GDE3 in osteoblasts promotes disassembly of actin stress fibers, decrease in growth rate, and increase in alkaline phosphatase activity and calcium content, indicating a role for GDE3 in induction of differentiation. Thus, we have identified the GDE3 substrate GroPIns as a candidate mediator for osteoblast proliferation, in line with the GroPIns activity observed previously in epithelial cells.