Transforming growth factor (TGF)-beta represents a prototype of multifunctional cytokine. Its broad activities include, among others, context-specific inhibition or stimulation of cell proliferation, control of extracellular matrix (ECM) synthesis and degradation, control of mesenchymal-epithelial interactions during embryogenesis, mediation of cell and tissue responses to injury, control of carcinogenesis, and modulation of immune functions. Regulation of production and turnover of ECM components is essential for tissue homeostasis and function. TGF-beta exerts its effects on cell proliferation, differentiation, and migration in part through its capacity to modulate the deposition of ECM components. Specifically, TGF-beta isoforms have the ability to induce the expression of ECM proteins in mesenchymal cells, and to stimulate the production of protease inhibitors that prevent enzymatic breakdown of the ECM. Deregulation of these functions is associated with abnormal connective tissue deposition, as observed, for example, during scarring or fibrotic processes. In this review we discuss the current understanding of the signaling mechanisms used by TGF-beta to elicit its effects on target genes, focusing primarily on Smad proteins and their role in the transcriptional regulation of ECM gene expression. Other signaling mechanisms, such as the MAP/SAP kinase or Ras pathways, although potentially important for transmission of some of the TGF-beta signals, will not be described. Transforming growth factor-beta (TGF-beta) plays a critical role in the regulation of extracellular matrix gene expression. Its overexpression is believed to contribute to the development of tissue fibrosis. The recent identification of Smad proteins, TGF-beta receptor kinase substrates that translocate into the cell nucleus to act as transcription factors, has increased our understanding of the molecular mechanisms underlying TGF-beta action. This review focuses primarily on the mechanisms underlying Smad modulation of gene expression and how they relate to wound healing. Potential implications for the development of therapeutic approaches against tissue fibrosis are discussed.