A key goal of cellular engineering is to manipulate progenitor cells to become ␤-cells, allowing cell replacement therapy to cure diabetes mellitus. As a paradigm for cell engineering, we have studied the molecular mechanisms by which AR42J cells become ␤-cells. Bone morphogenetic proteins (BMPs), implicated in a myriad of developmental pathways, have not been well studied in insulin-positive differentiation. We found that the canonical intracellular mediators of BMP signaling, Smad-1 and Smad-8, were significantly elevated in AR42J cells undergoing insulin-positive differentiation in response to exendin-4 treatment, suggesting a role for BMP signaling in ␤-cell formation. Similarly, endogenous BMP-2 ligand and ALK-1 receptor (activin receptor-like kinase-1; known to activate Smads 1 and 8) mRNAs were specifically up-regulated in exendin-4-treated AR42J cells. Surprisingly, Smad-1 and Smad-8 levels were suppressed by the addition of BMP-soluble receptor inhibition of BMP ligand binding to its receptor. Here, insulin-positive differentiation was also ablated. BMP-2 ligand antisense also strongly inhibited Smad-1 and Smad-8 expression, again with the abolition of insulin-positive differentiation. These results demonstrate a previously unrecognized key role for BMP signaling in mediating insulin-positive differentiation through the intracellular Smad signaling pathway. In short, BMP signaling may represent a novel downstream target of exendin-4 (glucagon-like peptide 1) signaling and potentially serve as an upstream regulator of transforming growth factor-␤ isoform signaling to differentiate the acinarlike AR42J cells into insulin-secreting cells.Type 1 diabetes is an insulin deficiency state due to pancreatic destruction of ␤-cells caused by autoimmunity. Several approaches to treat diabetes are being pursued, such as islet cell transplantation, pancreas transplantation, and genetic manipulation. However, a key alternative strategy is cellular engineering to manipulate progenitor cells to become ␤-cells, allowing cellular therapy to cure diabetes. As a paradigm for cell engineering, we have used exendin-4 treatment of AR42J cells, a fairly plastic acinar cell carcinoma-derived cell line, as a model for studying the role of bone morphogenetic protein (BMP) 2 signaling in the induction of insulin-positive differentiation. Exendin-4, a peptide from Helodermatidae venom, is a novel insulinotropic agent and a long acting analogue of glucagon-like peptide-1 (GLP-1). It interacts with endocrine pancreatic islet GLP-1 receptors, inducing a stimulatory effect on insulin secretion. Over the past few decades significant progress has been made in our understanding of the biological function of BMPs, which have been found to regulate a myriad of developmental and differentiation process in the embryo, including epithelial-mesenchymal interactions, cell fate specification, dorsoventral patterning, and apoptosis as well as the secretion of extracellular matrix components (1-5).BMPs are one of the multifunctional cytokines from...