Smad signalling plays important roles in developmental and cancer biology as well as in fibropathogenesis. Its role in keloid biology is not known. Epithelial-mesenchymal interactions, originally described in normal skin, have recently been established to play a significant role in keloid pathogenesis, and demonstrate the important influence of keratinocyte paracrine factor signalling on fibroblast behaviour. The present study investigated the role of downstream Smad cascade induction in this interaction. Normal fibroblasts (NF) and keloid fibroblasts (KF) were co-cultured in serum-free medium with normal keratinocytes (NK) or keloid keratinocytes (KK) for 5 days, after which fibroblast cell lysates were subjected to western blot and immunoprecipitation analysis to quantify the levels of Smad and Smad2/3/4 binding complex. In another set of experiments, wild-type (wt), Smad2-null (Smad2-/-) and Smad3-null (Smad3-/-) mouse embryonic fibroblasts (MEF) were assayed for cell proliferation and collagen production after serum-free co-culture with KK or exposure to conditioned media collected from serum-free KK/KF co-culture. Compared to normal skin, keloids expressed high basal levels of TGFbetaR1 and TGFbetaR2, Smad2, 3 and 4 and phospho-Smad2. Upregulation of TGFbetaR1 and TGFbetaR2, Smad3 and p-Smad2 was observed in KF co-cultured with KK, together with enhanced Smad3 phosphorylation and Smad2/3/4 binding complex production. When MEF-wt, MEF-Smad2-/- or MEF-Smad3-/- were co-cultured with KK or exposed to KK/KF co-culture conditioned media, enhanced proliferation and collagen production were seen in MEF-wt and MEF-Smad2-/- but not in MEF-Smad3-/- cells. The activation of Smad signalling, importantly that of Smad3, appears to be one facet of the complex epithelial-mesenchymal interactions in keloid pathogenesis, resulting in active KF proliferation and collagen-ECM production in co-culture with KK. This finding suggests the suppression of Smad signalling as a novel approach in keloid therapy.