BMP-2 (bone morphogenetic protein-2) promotes differentiation of osteoblast precursor cells to mature osteoblasts that form healthy bone. In the present study, we demonstrate a novel mechanism of BMP-2-induced osteoblast differentiation. The antioxidant NAC (N-acetyl-L-cysteine) and the flavoprotein enzyme NAD(P)H oxidase inhibitor DPI (diphenyleneiodonium) prevented BMP-2-stimulated alkaline phosphatase expression and mineralized bone nodule formation in mouse 2T3 pre-osteoblasts. BMP-2 elicited a rapid generation of ROS (reactive oxygen species) concomitant with increased activation of NAD(P)H oxidase. NAC and DPI inhibited BMP-2-induced ROS production and NAD(P)H oxidase activity respectively. NAD(P)H oxidases display structurally similar catalytic subunits (Nox1-5) with differential expression in various cells. We demonstrate that 2T3 pre-osteoblasts predominantly express the Nox4 isotype of NAD(P)H oxidase. To extend this finding, we tested the functional effects of Nox4. Adenovirus-mediated expression of dominant-negative Nox4 inhibited BMP-2-induced alkaline phosphatase expression. BMP-2 promotes expression of BMP-2 for maintenance of the osteoblast phenotype. NAC and DPI significantly blocked BMP-2-stimulated expression of BMP2 mRNA and protein due to a decrease in BMP2 gene transcription. Dominant-negative Nox4 also mimicked this effect of NAC and DPI. Our results provide the first evidence for a new signalling pathway linking BMP-2-stimulated Nox4-derived physiological ROS to BMP-2 expression and osteoblast differentiation.