Lack of knowledge regarding specific causes for late loss of kidney transplants hampers improvements in long-term allograft survival. Kidney transplants with both interstitial fibrosis and subclinical inflammation but not fibrosis alone after 1 year have reduced survival. This study tested whether fibrosis with inflammation at 1 year associates with decline of renal function in a low-risk cohort and characterized the nature of the inflammation. We studied 151 living-donor, tacrolimus/mycophenolate-treated recipients without overt risk factors for reduced graft survival. Transplants with normal histology (n = 86) or fibrosis alone (n = 45) on 1-year protocol biopsy had stable renal function between 1 and 5 years, whereas those with both fibrosis and inflammation (n = 20) exhibited a decline in GFR and reduced graft survival. Immunohistochemistry confirmed increased interstitial T cells and macrophages/dendritic cells in the group with both fibrosis and inflammation, and there was increased expression of transcripts related to innate and cognate immunity. Pathway- and pathologic process-specific analyses of microarray profiles revealed that potentially damaging immunologic activities were enriched among the overexpressed transcripts (e.g., Toll-like receptor signaling, antigen presentation/dendritic cell maturation, IFN-γ-inducible response, cytotoxic T lymphocyte-associated and acute rejection-associated genes). Therefore, the combination of fibrosis and inflammation in 1-year protocol biopsies associates with reduced graft function and survival as well as a rejection-like gene expression signature, even among recipients with no clinical risk factors for poor outcomes. Early interventions aimed at altering rejection-like inflammation may improve long-term survival of kidney allografts.