Transforming growth factor beta (TGF-beta) is a secreted protein that regulates proliferation, differentiation and death of various cell types. All immune cell lineages, including B, T and dendritic cells as well as macrophages, secrete TGF-beta, which negatively regulates their proliferation, differentiation and activation by other cytokines. Thus, TGF-beta is a potent immunosuppressor and perturbation of TGF-beta signaling is linked to autoimmunity, inflammation and cancer. Regulation of cell proliferation and differentiation by TGF-beta is a topic of great basic and clinical importance. We summarize our work on the growth inhibitory pathway downstream of TGF-beta, which is triggered by receptor serine/threonine kinases at the cell surface and downstream effectors of the Smad family. Activated Smads regulate transcription of target genes, including cell cycle inhibitors such as p21, which mediate the anti-proliferative response and partially explain the tumor suppressive action of the TGF-beta pathway. We have described a molecular mechanism of regulation of the p21 gene by Smads and transcription factor Sp1. At late stages of tumor progression, TGF-beta promotes tumorigenesis via suppression of the immune system and changes in cell differentiation of epithelial tumor cells, a phenomenon termed epithelial to mesenchymal transdifferentiation (EMT). We review our work on the role of the Smad pathway in controlling EMT. In conclusion, the molecular pathways that describe the anti-proliferative and transdifferentiating effects of TGF-beta in epithelial cells have been uncovered to great molecular detail; a future challenge will be to test their generality in other systems, including the immune system.