Smad4 is the central mediator for TGF-beta/BMP signals, which are involved in regulating cranial neural crest (CNC) cell formation, migration, proliferation and fate determination. It is unclear whether TGF-beta/BMP signals utilize Smad-dependent or -independent pathways to control the development of CNC cells. To investigate the functional significance of Smad4 in regulating CNC cells, we generated mice with neural crest specific inactivation of the Smad4 gene. Our study shows that Smad4 is not required for the migration of CNC cells, but is required in neural crest cells for the development of the cardiac outflow tract. Smad4 is essential in mediating BMP signaling in the CNC-derived ectomesenchyme during early stages of tooth development because conditional inactivation of Smad4 in neural crest derived cells results in incisor and molar development arrested at the dental lamina stage. Furthermore, Smad-mediated TGF-beta/BMP signaling controls the homeobox gene patterning of oral/aboral and proximal/distal domains within the first branchial arch. At the cellular level, a Smad4-mediated downstream target gene(s) is required for the survival of CNC cells in the proximal domain of the first branchial arch. Smad4 mutant mice show underdevelopment of the first branchial arch and midline fusion defects. Taken together, our data show that TGF-beta/BMP signals rely on Smad-dependent pathways in the ectomesenchyme to mediate epithelial-mesenchymal interactions that control craniofacial organogenesis.