Recent studies of transforming growth factor-beta (TGF-beta) signaling have identified a signaling pathway that includes Ser/Thr kinase transmembrane receptors, intracellular substrates and transducers of receptor activation known as Smads, and DNA-binding transcription factors that are regulated by interaction with Smads. Both genetic and biochemical studies show that Smads are central mediators of TGF-beta signaling. How do Smads regulate the expression of target genes in the nucleus? Over the past three years, transcription factors involved in TGF-beta signaling have been identified and the molecular events in the nucleus have begun to be understood. Both Smads, which have intrinsic DNA binding activity, and additional transcription factors, act together to regulate the expression of target genes in the nucleus. Smads are relatively ubiquitously expressed in embryos during the development, while interacting transcription factors are expressed with a restricted pattern, either temporally or spatially. Therefore the developmental specificity of TGF-beta signaling may be, at least in part, determined by cell-type specific transcription factors.