Smads are pivotal intracellular nuclear effectors of transforming growth factor-beta (TGF-beta) family members. Ligand-induced activation of TGF-beta family receptors with intrinsic serine/threonine kinase activity trigger phosphorylation of receptor-regulated Smads (R-Smads), whereas Smad2 and Smad3 are phosphorylated by TGF-beta, and activin type I receptors, Smad1, Smad5 and Smad8, act downstream of BMP type I receptors. Activated R-Smads form heteromeric complexes with common-partner Smads (Co-Smads), e.g. Smad4, which translocate efficiently to the nucleus, where they regulate, in co-operation with other transcription factors, coactivators and corepressors, the transcription of target genes. Inhibitory Smads act in most cases in an opposite manner from R- and Co-Smads. Like other components in the TGF-beta family signaling cascade, Smad activity is intricately regulated. The multifunctional and context dependency of TGF-beta family responses are reflected in the function of Smads as signal integrators. Certain Smads are somatically mutated at high frequency in particular types of human cancers. Gene ablation of Smads in the mouse has revealed their critical roles during embryonic development. Here we review the latest advances in our understanding of the Smad mechanism of action and their in vivo functions.