Interactions between TGFβ1 and ras signaling pathways play an important role in cancer development. Here we show that in primary mouse keratinocytes, v‐ras^Ha does not block the early biochemical events of TGFβ1 signal transduction but does alter global TGFβ1 mediated gene expression in a gene specific manner. Expression of Smad3 dependent TGFβ1 early response genes and the TGFβ1 cytostatic gene expression response were not altered by v‐ras^Ha consistent with an intact TGFβ1 growth arrest. However, TGFβ1 and v‐ras^Ha cause significant alteration in genes regulating matrix remodeling as the TGFβ1 induction of extracellular matrix genes was blocked by v‐ras^Ha but specific matrix proteases associated with cancer progression were elevated. Smad3 deletion in keratinocytes repressed normal differentiation maker expression and caused expression of Keratin 8 a simple epithelial keratin and marker of malignant conversion. Smad3 was required for the TGFβ1 cytostatic response in v‐ras^Ha keratinocytes, but also for protease induction, keratinocyte attachment and migration. These results show that pro‐oncogenic activities of TGFβ1 can occur early in carcinogenesis before loss of its tumor suppressive function and that selective regulation rather than complete inactivation of Smad3 function may be crucial for tumor progression. © 2008 Wiley‐Liss, Inc.