Transforming growth factor (TGF)beta is an important physiological regulator of cellular growth and differentiation. It activates a receptor threonine/serine kinase that phosphorylates the transcription factor Smad2, which then translocates into the nucleus to trigger specific transcriptional events. Here we show that activated type I and II TGF beta receptors internalize into endosomes containing the early endosomal protein EEA1. The extent of TGF beta-stimulated Smad2 phosphorylation, Smad2 nuclear translocation, and TGF beta-stimulated transcription correlated closely with the extent of internalization of the receptor. TGF beta signaling also requires SARA (Smad anchor for receptor activation), a 135-kD polypeptide that contains a FYVE Zn(++) finger motif. Here we show that SARA localizes to endosomes containing EEA1, and that disruption of this localization inhibits TGF beta-induced Smad2 nuclear translocation. These results indicate that traffic of the TGF beta receptor into the endosome enables TGF beta signaling, revealing a novel function for the endosome as a compartment specialized for the amplification of certain extracellular signals.