Previously we demonstrated that bone morphogenetic protein-7 (BMP-7) treatment polarizes monocytes into M2 macrophages and increases the expression of anti-inflammatory cytokines. Despite these findings, the mechanisms for the observed BMP-7 induced monocyte polarization into M2 macrophages are completely unknown. In this study, we demonstrate the mechanisms involved in the polarization of monocytes into M2 macrophages. Apoptotic conditioned media (ACM) was generated to mimic the stressed conditions, inducing monocyte polarization. Monocytes were treated with ACM along with BMP-7 and/or its inhibitor, follistatin, for 48 hours. Furthermore, an inhibitor of the PI3K pathway, LY-294002, was also studied. Our data show that BMP-7 induces polarization of monocytes into M2 macrophages while significantly increasing the expression of anti-inflammatory markers, arginase-1 and IL-10, and significantly (p<0.05) decreasing the expression of pro-inflammatory markers iNOS, IL-6, TNF-α and MCP-1; (p<0.05). Moreover, addition of the PI3K inhibitor, LY-294002, significantly (p<0.05) decreases upregulation of IL-10 and arginase-1, suggesting involvement of the PI3K pathway in M2 macrophage polarization. Next, following BMP-7 treatment, a significant (p<0.05) increase in p-SMAD1/5/8 and p-PI3K expression resulting in downstream activation of p-Akt and p-mTOR was observed. Furthermore, expression of p-PTEN, an inhibitor of the PI3K pathway, was significantly (p<0.05) increased in the ACM group. However, BMP-7 treatment inhibited its expression, suggesting involvement of the PI3K-Akt-mTOR pathway. In conclusion, we demonstrate that BMP-7 polarizes monocytes into M2 macrophages and enhances anti-inflammatory cytokine expression which is mediated by the activated SMAD-PI3K-Akt-mTOR pathway.