Although the bone morphogenetic proteins (BMPs) are multifunctional proteins, implantation of osteogenic BMPs such as BMP-2 and BMP-7 at an osseous or extraosseous site results in bone and cartilage formation. These molecules are soluble, local-acting signaling proteins, which bind to specific receptors on the surface of the cell. The receptors then transduce the signal via a group of proteins called Smads, which in turn activate particular genes. In vivo, these BMPs act primarily as differentiation factors, turning responsive mesenchymal cells into cartilage- and bone-forming cells. A summary of the in vitro and in vivo studies suggests that implantation of these BMPs stimulates cells from the soft and hard tissues (e.g., muscle, bone marrow, periosteum) to become bone, and in some cases, cartilage forming cells. The activity of BMPs is tightly controlled at many levels. The tissue-specific transcription factor (basic helix–loop–helix factor) and its binding sequence (E-box) together play a critical role in deciding the expression of BMPs. Outside the cell, soluble inhibitory proteins such as noggin, chordin, and follistatin can bind certain of the BMPs and inhibit their binding to cell surface receptors. Inside the cell, the activity of BMPs is controlled through the combination of signal-transducing and inhibitory Smad proteins. Bone morphogenetic proteins can upregulate expression of the inhibitory Smad proteins. These Smads are phosphorylated and translocate into the nucleus, where they regulate the transcription of target genes together with other transcription factors including PEBP2αA/Cbfa1. Cooperation between PEBP2αA/Cbfa1 and BMP-activated Smad (Smad1/5) in the nucleus induces the expression of the genes related to the osteoblast phenotype. In addition, a number of negative regulators of BMP action exist within the nucleus. All of these regulatory mechanisms together cause the bone-induction process to be controlled tightly and self-limiting. Thus, bone induction is observed only locally at the site of BMP and matrix implantation, as defined by the volume of matrix, and it is limited temporally only to the time when the BMP is present.