diff --git a/CHANGELOG-Colang.md b/CHANGELOG-Colang.md
index 5ff1ff619..03b194335 100644
--- a/CHANGELOG-Colang.md
+++ b/CHANGELOG-Colang.md
@@ -4,6 +4,12 @@ All notable changes to the Colang language and runtime will be documented in thi
 
 The format is based on [Keep a Changelog](https://keepachangelog.com/en/1.0.0/), and this project adheres to [Semantic Versioning](https://semver.org/spec/v2.0.0.html).
 
+## [2.0-beta.7] - 2025-07-16
+
+### Fixed
+
+* Use processed user and bot messages after input/output rails transformations to prevent leakage of unfiltered data ([#1297](https://github.com/NVIDIA/NeMo-Guardrails/pull/1297)) by @lapinek
+
 ## [2.0-beta.6] - 2025-01-16
 
 ### Added
diff --git a/nemoguardrails/colang/v2_x/library/guardrails.co b/nemoguardrails/colang/v2_x/library/guardrails.co
index a591a3925..9f6e1de00 100644
--- a/nemoguardrails/colang/v2_x/library/guardrails.co
+++ b/nemoguardrails/colang/v2_x/library/guardrails.co
@@ -60,13 +60,19 @@ flow _bot_say $text
   global $output_rails_in_progress
 
   $bot_message = $text
-  $last_bot_message = $text
 
   # We need to avoid running output rails on messages coming from the output rails themselves.
   if not $output_rails_in_progress
     await run output rails $text
 
-  await UtteranceBotAction(script=$text) as $action
+  # Use the processed bot message if available;
+  # otherwise, fall back to the original text
+  if $bot_message is not None
+    $last_bot_message = $bot_message
+  else
+    $last_bot_message = $text
+
+  await UtteranceBotAction(script=$last_bot_message) as $action
 
 
 flow run input rails $input_text
diff --git a/nemoguardrails/colang/v2_x/library/llm.co b/nemoguardrails/colang/v2_x/library/llm.co
index ee1c53cf9..e80456525 100644
--- a/nemoguardrails/colang/v2_x/library/llm.co
+++ b/nemoguardrails/colang/v2_x/library/llm.co
@@ -49,6 +49,7 @@ flow generating user intent for unhandled user utterance
   activate polling llm request response
   activate tracking bot talking state
   global $bot_talking_state
+  global $user_message
 
   await _user_said_something_unexpected as $user_said
   $event = $user_said.event
@@ -60,7 +61,15 @@ flow generating user intent for unhandled user utterance
 
   log 'unexpected user utterance: "{$event.final_transcript}"'
   log 'start generating user intent...'
-  $action = 'user said "{$event.final_transcript}"'
+
+  # Use the processed user message if available;
+  # otherwise, fall back to the original user input
+  if $user_message is not None
+    $message_for_llm = $user_message
+  else
+    $message_for_llm = $event.final_transcript
+
+  $action = 'user said "{$message_for_llm}"'
   $intent = await GenerateUserIntentAction(user_action=$action, max_example_flows=20)
   log 'generated user intent: {$intent}'
 
@@ -68,7 +77,8 @@ flow generating user intent for unhandled user utterance
   send FinishFlow(flow_id=$intent)
 
   # We need to log the user action
-  send UserActionLog(flow_id="user said", parameter=$event.final_transcript, intent_flow_id=$intent)
+  send UserActionLog(flow_id="user said", parameter=$message_for_llm, intent_flow_id=$intent)
+
   # And we also need to log the generated user intent if not done by another mechanism
   when UserIntentLog(flow_id=$intent)
     return
@@ -84,6 +94,7 @@ flow continuation on unhandled user utterance
   activate polling llm request response
   activate tracking bot talking state
   global $bot_talking_state
+  global $user_message
 
   await _user_said_something_unexpected as $user_said
   $event = $user_said.event
@@ -95,7 +106,15 @@ flow continuation on unhandled user utterance
     abort
 
   log 'start generating user intent and bot intent/action...'
-  $action = 'user said "{$event.final_transcript}"'
+
+  # Use the processed user message if available;
+  # otherwise, fall back to the original user input
+  if $user_message is not None
+    $message_for_llm = $user_message
+  else
+    $message_for_llm = $event.final_transcript
+
+  $action = 'user said "{$message_for_llm}"'
 
 
   # retrieve relevant chunks from KB if user_message is not empty
@@ -117,7 +136,8 @@ flow continuation on unhandled user utterance
   send FinishFlow(flow_id=$user_intent)
 
   # We need to log the user action
-  send UserActionLog(flow_id="user said", parameter=$event.final_transcript, intent_flow_id=$user_intent)
+  send UserActionLog(flow_id="user said", parameter=$message_for_llm, intent_flow_id=$user_intent)
+
   # And we also need to log the generated user intent if not done by another mechanism
   when UserIntentLog(flow_id=$user_intent)
     return
diff --git a/tests/v2_x/test_input_output_rails_transformations.py b/tests/v2_x/test_input_output_rails_transformations.py
new file mode 100644
index 000000000..181db19bf
--- /dev/null
+++ b/tests/v2_x/test_input_output_rails_transformations.py
@@ -0,0 +1,60 @@
+# SPDX-FileCopyrightText: Copyright (c) 2023 NVIDIA CORPORATION & AFFILIATES. All rights reserved.
+# SPDX-License-Identifier: Apache-2.0
+#
+# Licensed under the Apache License, Version 2.0 (the "License");
+# you may not use this file except in compliance with the License.
+# You may obtain a copy of the License at
+#
+# http://www.apache.org/licenses/LICENSE-2.0
+#
+# Unless required by applicable law or agreed to in writing, software
+# distributed under the License is distributed on an "AS IS" BASIS,
+# WITHOUT WARRANTIES OR CONDITIONS OF ANY KIND, either express or implied.
+# See the License for the specific language governing permissions and
+# limitations under the License.
+
+from nemoguardrails import RailsConfig
+from tests.utils import TestChat
+
+yaml_content = """
+colang_version: "2.x"
+models:
+  - type: main
+    engine: openai
+    model: gpt-4-turbo
+"""
+
+
+def test_1():
+    """Test input and output rails transformations."""
+
+    colang_content = """
+    import core
+    import guardrails
+
+    flow input rails $input_text
+        global $user_message
+        $user_message = "{$input_text}, Dick"
+
+    flow output rails $output_text
+        global $user_message
+        global $bot_message
+        $bot_message = "{$user_message}, and Harry"
+
+    flow main
+        global $last_bot_message
+        await user said "Tom"
+        bot say "{$last_bot_message}"
+    """
+
+    config = RailsConfig.from_content(colang_content, yaml_content)
+    chat = TestChat(
+        config,
+        llm_completions=[],
+    )
+    chat >> "Tom"
+    chat << "Tom, Dick, and Harry"
+
+
+if __name__ == "__main__":
+    test_1()