Transforming growth factor-beta (TGF-beta) is a multifunctional regulator of a variety of cellular functions, including proliferation, differentiation, matrix synthesis, and apoptosis. In growth plate chondrocytes, TGF-beta slows the rate of maturation. Because the current paradigm of TGF-beta signaling involves Smad proteins as downstream regulators of target genes, we have characterized their role as mediators of TGF-beta effects on chondrocyte maturation. Both Smad2 and 3 translocated to the nucleus upon TGF-beta1 signaling, but not upon BMP-2 signaling. Cotransfection experiments using the TGF-beta responsive and Smad3 sensitive p3TP-Lux luciferase reporter demonstrated that wild-type Smad3 potentiated, whereas dominant negative Smad3 inhibited TGF-beta1 induced luciferase activity. To confirm the role of Smad2 and 3 as essential mediators of TGF-beta1 effects on chondrocyte maturation, we overexpressed both wild-type and dominant negative Smad2 and 3 in virally infected chondrocyte cultures. Overexpression of both wild-type Smad2 and 3 potentiated the inhibitory effect of TGF-beta on chondrocyte maturation, as determined by colx and alkaline phosphatase activity, whereas dominant negative Smad2 and 3 blocked these effects. Wild-type and dominant negative forms of Smad3 had more pronounced effects than Smad2. Our results define Smad2 and 3 as key mediators of the inhibitory effect of TGF-beta1 signaling on chondrocyte maturation.