To current knowledge, transforming growth factor beta (TGFbeta) signaling is mandatory to establish liver fibrosis and various molecular interventions designed to affect the TGFbeta system were successfully used to inhibit fibrogenesis. Activated hepatic stellate cells (HSC), which are one important source of TGFbeta, are the major producers of extracellular matrix proteins in liver injury. We have previously shown that the TGFbeta response of this cell type is modulated during the transdifferentiation process. This work delineates the activation of TGFbeta downstream mediators, the Smads, in quiescent HSC and transdifferentiated myofibroblasts (MFB). The expression level of all Smads remained largely unchanged during this process. The response of HSC to TGFbeta, leading to, e.g., induction of alpha2 (I) collagen expression, is mediated by phosphorylation of Smad2 and Smad3 and subsequent nuclear translocation of a Smad containing complex. Neither TGFbeta-dependent nor endogenously phosphorylated Smad2/3 was detectable in comparable amounts in transdifferentiated MFB, indicating loss of TGFbeta sensitivity. Ectopic expression of Smad7 in HSC led to inhibition of Smad2 phosphorylation and abrogated TGFbeta response. In transdifferentiated MFB, expression of a constitutively active TGFbeta receptor I, but not treatment with TGFbeta1, resulted in transcriptional activation of a TGFbeta responsive promoter, thereby demonstrating completely restored TGFbeta signal transduction. Our data indicate that in contrast to a postulated mechanism of enduring autocrine TGFbeta signal transduction, early and late stages of HSC activation have to be distinguished, which is of importance for antifibrotic therapies.