Pharmacological glucocorticoids (GCs) inhibit bone formation, leading to osteoporosis. GCs inhibit bone morphogenetic protein-2 (Bmp2) expression, and rhBMP-2 restores mineralization in GC-arrested osteoblast cultures. To better understand how GCs regulate BMPs, we investigated Bmp transcription, as well as rhBMP-induced Smad and alkaline phosphatase (ALP) activity. Bmp2 cis-regulatory regions were analyzed by reporter plasmids and LacZ-containing bacterial artificial chromosomes. We found that GCs inhibited Bmp2 via a domain > 50 kb downstream of the coding sequence. Bmp expression was evaluated by RT-PCR; whereas GCs strongly inhibited Bmp2, Bmp4 was abundantly expressed and resistant to GCs. Both rhBMP-2 and rhBMP-4 restored mineralization in GC-arrested cultures; rhBMP-2 was 5-fold more effective when dosing was based on ALP activation, however, the rhBMPs were equipotent when dosing was based on Smad transactivation. In conclusion, GCs regulate Bmp2 via a far-downstream domain, and activation of Smad, not ALP, best predicts the pro-mineralization potential of rhBMPs.