The Smad family of intracellular signaling intermediates transduce signals downstream from the transforming growth factor beta (TGF-beta) family of receptor serine threonine kinases. The original member of this family, Smad1, has been shown to mediate signals from receptors for the bone morphogenetic proteins (BMPs), a large group of ligands in the TGF-beta superfamily that mediate important developmental events. We have targeted the Smad1 gene in mice and created mutants null at this locus. Smad1 mutant mice die at approximately 9.5 days postcoitum due to defects in allantois formation. In Smad1 mutant mice, the allantois fails to fuse to the chorion, resulting in a lack of placenta and failure to establish a definitive embryonic circulation. Although vasculogenesis is initiated in the mutant allantois, the vessels formed are disorganized, and VCAM-1 protein, a marker for distal allantois development, is not expressed. Smad1 null fibroblasts are still able to respond to BMP2, however, suggesting that the defect observed in the developing extraembryonic tissue is caused by a very specific loss of transcriptional activity regulated by Smad1. Our data further demonstrate that although highly similar structurally, Smad proteins are not functionally homologous.