It is now clear that resident myofibroblasts play a central role in the mediation of tissue fibrosis. The aim of the work outlined in this study is to increase our understanding of the mechanisms which drive the phenotypic and functional changes associated with the differentiation process. We have used an in vitro model of transforming growth factor-β1 (TGF-β1)-induced pulmonary fibroblast–myofibroblast differentiation to examine the role of the TGF-β1 Smad protein signaling intermediates, in alterations of fibroblast phenotype and function associated with terminal differentiation. TGF-β1 induced marked alteration in cell phenotype, such that cells resembled “epithelioid-postmitotic fibroblasts.” This was associated with marked reorganization of the actin cytoskeleton and upregulation of αSMA gene expression. TGF-β1 stimulation also induced αSMA protein expression with increased incorporation of αSMA into stress fibers. Following stimulation with TGF-β1, subsequent addition of serum-free medium did not reverse TGF-β1-induced morphological change, suggesting that TGF-β1 induced a relatively stable alteration in fibroblast cell phenotype. Functionally, these phenotypic changes were associated with induction of type I, type III, and type IV collagen gene expression and an increase in the concentrations of the respective collagens in the cell culture supernatant. The role of Smad proteins in terminal differentiation of fibroblasts was examined by transfection of cells, with expression vectors for the TGFβ1 receptor-regulated Smads (R-Smads) or the co-Smad, Smad 4. Transfection with Smad2 but not Smad3 resulted in TGF-β1 independent alteration in fibroblast cell phenotype, up-regulation of αSMA mRNA and reorganization of the actin cytoskeleton. Transfection with Smad4 also induced alteration in cell phenotype, although this was not as pronounced as the effect of overexpression of Smad2. Overexpression of the Smad2, Smad3, or Smad4 proteins was associated with increased production of all collagen types. The study suggests that the phenotypic and functional changes associated with TGF-β1-induced fibroblast terminal differentiation are differentially regulated by Smad proteins.