Smad2 and Smad3 are closely related effectors of TGFbeta/Nodal/Activin-related signaling. Smad3 mutant mice develop normally, whereas Smad2 plays an essential role in patterning the embryonic axis and specification of definitive endoderm. Alternative splicing of Smad2 exon 3 gives rise to two distinct protein isoforms. The short Smad2(Deltaexon3) isoform, unlike full-length Smad2, Smad2(FL), retains DNA-binding activity. Here, we show that Smad2(FL) and Smad2(Deltaexon3) are coexpressed throughout mouse development. Directed expression of either Smad2(Deltaexon3) or Smad3, but not Smad2(FL), restores the ability of Smad2-deficient embryonic stem (ES) cells to contribute descendants to the definitive endoderm in wild-type host embryos. Mice engineered to exclusively express Smad2(Deltaexon3) correctly specify the anterior-posterior axis and definitive endoderm, and are viable and fertile. Moreover, introducing a human Smad3 cDNA into the mouse Smad2 locus similarly rescues anterior-posterior patterning and definitive endoderm formation and results in adult viability. Collectively, these results demonstrate that the short Smad2(Deltaexon3) isoform or Smad3, but not full-length Smad2, activates all essential target genes downstream of TGFbeta-related ligands, including those regulated by Nodal.