The aim of this study was to investigate whether transforming growth factor-β1 (TGF-β1) could induce alveolar epithelial-mesenchymal transition (EMT) in vitro, and whether Smad7 gene transfer could block this transition. We also aimed to elucidate the possible mechanisms of these processes. The Smad7 gene was transfected to the rat type II alveolar epithelial cell line (RLE-6TN). Expression of the EMT-associated markers was assayed by Western Blot and Real-time PCR. Morphological alterations were examined via phase-contrast microscope and fluorescence microscope, while ultrastructural changes were examined via electron microscope. TGF-β1 treatment induced a fibrotic phenotype of RLE-6TN with increased expression of fibronectin (FN), α-smooth muscle actin (α-SMA) and vimentin, and decreased expression of E-cadherin (E-cad) and cytokeratin19 (CK19). After transfecting the RLE-6TN with the Smad7 gene, the expression of the mesenchymal markers was downregulated while that of the epithelial markers was upregulated. TGF-β1 treatment for 48 h resulted in the separation of RLE-6TN from one another and a change into elongated, myofibroblast-like cells. After the RLE-6TN had been transfected with the Smad7 gene, TGF-β1 treatment had no effect on the morphology of the RLE-6TN. TGF-β1 treatment for 48 h resulted in an abundant expression of α-SMA in the RLE-6TN. If the RLE-6TN were transfected with the Smad7 gene, TGF-β1 treatment for 48 h could only induce a low level of α-SMA expression. Furthermore, TGF-β1 treatment for 12 h resulted in the degeneration and swelling of the osmiophilic multilamellar bodies, which were the markers of type II alveolar epithelial cells. TGF-β1 can induce alveolar epithelial-mesenchymal transition in vitro, which is dependent on the Smads signaling pathway to a certain extent. Overexpression of the Smad7 gene can partially block this process.