Recent findings on the role of transforming growth factor (TGF)-β/Smad3 signaling in the pathogenesis of obesity and type 2 diabetes have underscored its importance in metabolism and adiposity. Indeed, elevated TGF-β has been previously reported in human adipose tissue during morbid obesity and diabetic neuropathy. In this review, we discuss the pleiotropic effects of TGF-β/Smad3 signaling on metabolism and energy homeostasis, all of which has an important part in the etiology and progression of obesity-linked diabetes; these include adipocyte differentiation, white to brown fat phenotypic transition, glucose and lipid metabolism, pancreatic function, insulin signaling, adipocytokine secretion, inflammation and reactive oxygen species production. We summarize the recent in vivo findings on the role of TGF-β/Smad3 signaling in metabolism based on the studies using Smad3(-/-) mice. Based on the presence of a dual regulatory effect of Smad3 on peroxisome proliferator-activated receptor (PPAR)β/δ and PPARγ2 promoters, we propose a unifying mechanism by which this signaling pathway contributes to obesity and its associated diabetes. We also discuss how the inhibition of this signaling pathway has been implicated in the amelioration of many facets of metabolic syndromes, thereby offering novel therapeutic avenues for these metabolic conditions.