It has been suggested that TGFbeta can cause chronic allograft nephropathy by inducing epithelial to mesenchymal transition (EMT); some studies show a reverse transition can be produced by bone morphogenetic protein-7 (BMP7). The current study assessed the relative contribution of signals generated within tubular epithelial cells by TGFbeta and BMP7 in normal kidney and after transplantation. Epithelial cells in normal human kidneys expressed phosphorylated forms of both Smad2/3 and Smad1/5/8 within their nuclei; cell culture experiments showed that these signaling molecules were generated in response to TGFbeta and BMP7, respectively. Phospho(p)-Smad2/3 was expressed at increased levels by tubular epithelial cells during acute renal allograft rejection and chronic allograft nephropathy but pSmad1/5/8 was expressed at very low levels; this staining profile was associated with induction of the EMT marker, S100A4. Further in vitro experiments demonstrated that this pattern of Smad signaling was a consequence of the stimulation of tubular epithelial cells with TGFbeta in the absence of BMP7. Importantly, addition of BMP7 to TGFbeta-stimulated cells enhanced the expression of pSmad1/5/8 and reduced expression of S100A4. These results suggest that exogenous BMP7 could restore the homeostatic balance of pSmad signaling found in normal kidneys, thereby preventing or reversing the development of chronic allograft nephropathy.