Scleroderma is a chronic systemic disease that leads to fibrosis of affected organs. Transforming growth factor (TGF) beta has been implicated in the pathogenesis of scleroderma. Smad proteins are signaling transducers downstream from TGF-beta receptors. Three families of Smads have been identified: (i) receptor-regulated Smad2 and -3 (R-Smads); (ii) common partner Smad4 (Co-Smad); and (iii) inhibitory Smad6 and -7 (I-Smads, part of a negative feedback loop). We have investigated the signaling components for the TGF-beta pathway and TGF-beta activity in scleroderma lesions in vivo and in scleroderma fibroblasts in vitro. Basal level and TGF-beta-inducible expression of Smad7 are selectively decreased, whereas Smad3 expression is increased both in scleroderma skin and in explanted scleroderma fibroblasts in culture. TGF-beta signaling events, including phosphorylation of Smad2 and -3, and transcription of the PAI-1 gene are increased in scleroderma fibroblasts, relative to normal fibroblasts. In vitro adenoviral gene transfer with Smad7 restores normal TGF-beta signaling in scleroderma fibroblasts. These results suggest that alterations in the Smad pathway, including marked Smad7 deficiency and Smad3 up-regulation, may be responsible for TGF-beta hyperresponsiveness observed in scleroderma.