Smad7 mediates inhibition of Saos2 osteosarcoma cell differentiation by NFkappaB. The transcription factor NFkappaB is constitutively activated in various tumor cells where it promotes proliferation and represses apoptosis. The bone morphogenetic proteins (BMPs) delay cell proliferation and promote differentiation and apoptosis of bone cells through activation of Smad downstream effectors and via Smad-independent mechanisms. Thus, NFkappaB and BMP pathways play opposing roles in regulating osteoblastic cell fate. Here, we show that in osteosarcoma Saos2 osteoblasts, NFkappaB regulates the activity of the BMP/Smad signaling. Inhibition of NFkappaB by overexpression of mIkappaB leads to the induction of osteoblast differentiation. Saos2 cells overexpressing mIkappaB (Saos2-mIkappaB) exhibit higher expression of osteoblast phenotypic genes such as alkaline phosphatase, Runx2 and osteocalcin and are more responsive to BMP2 in comparison to wild-type cells (Saos2-wt) or empty vector infected controls (Saos2-EV). Furthermore, BMP-2 signaling and Smad phosphorylation are significantly increased in Saos2-mIkappaB cells in comparison to Saos2-EV cells. Inhibition of NFkappaB signaling in Saos2-mIkappaB cells is associated with decreased expression of the BMP signaling inhibitor Smad7. While gain of Smad7 function in Saos2-mIkappaB cells results in inhibition of BMP signaling, anti-sense knockdown of Smad7 in Saos2-EV cells leads to upregulation of BMP signaling. We therefore conclude that in osteosarcoma Saos2 cells, NFkappaB represses BMP/Smad signaling and BMP2-induced differentiation through Smad7.