Transforming growth factor beta (TGF-beta) and related polypeptides, including activins and bone morphogenetic proteins (BMPs), constitute the largest cytokine family, possessing fascinating features. TGF-beta and related peptides are multifunctional growth factors and they regulate many aspects of cellular processes such as proliferation, differentiation, adhesion and apoptosis. These evolutionarily conserved cytokines play an essential role in the development and homeostasis of virtually every tissue in organisms ranging from fruit flies to humans. Accordingly, inactivating mutations in several components of the TGF-beta signaling pathways have been found to cause a number of human disorders. The TGF-beta family members signal through cell surface serine/threonine kinase receptors. A family of proteins, designated as Smads (mammalian homologues of Drosophila Mad and C. elegans Sma), transduces the TGF-beta signal from cell surface to the nucleus. Upon activation, the TGF-beta type I receptor phosphorylates Smad2 and Smad3, which then form complexes with Smad4 and accumulate in the nucleus to regulate transcription of a variety of genes that encode crucial determinants of cell fate, such as cell cycle components, differentiation factors and cell adhesion molecules. Although Smad2 and Smad3 are highly homologous and share some overlapping activities, they have distinct functions and are regulated differentially. This review is primarily focused on our understanding of the similar as well as distinct function and regulation of Smad2 and Smad3 in TGF-beta signaling, their physiological roles revealed by knockout studies and their tumor suppressive functions.