Initial exposure of monocytes/macrophages to LPS induces hyporesponsiveness to a second challenge with LPS, a phenomenon termed LPS tolerance. Molecular mechanisms responsible for endotoxin tolerance are not well defined. We and others have shown that IL-1R-associated kinase (IRAK)-M and SHIP-1 proteins, negative regulators of TLR4 signaling, increase in tolerized cells. TGF-beta1, an anti-inflammatory cytokine, is upregulated following LPS stimulation, mediating its effect through SMAD family proteins. Using a monocytic cell line, THP1, we show that LPS activates endogenous SMAD4, inducing its migration into the nucleus and increasing its expression. Secondary challenge with high dose LPS following initial low-dose LPS exposure does not increase IRAK-M or SHIP1 protein expression in small hairpin (sh)SMAD4 THP-1 cells compared with control shLUC THP1 cells. TNF-alpha concentrations in culture supernatants after second LPS challenge are higher in shSMAD4 THP-1 cells than shLUC THP1 cells, indicating failure to induce maximal tolerance in absence of SMAD4 signaling. Identical results are seen in primary murine macrophages and mouse embryonic fibroblasts, demonstrating the biological significance of our findings. TGF-beta1 treatment does not increase IRAK-M or SHIP1 protein expression in shSMAD4 THP-1 cells, whereas it does so in shLUC THP1 cells, indicating that TGF-beta1 regulates IRAK-M and SHIP1 expression through a SMAD4-dependent pathway. Knockdown of endogenous SHIP1 by shSHIP1 RNA decreases native and inducible IRAK-M protein expression and prevents development of endotoxin tolerance in THP1 cells. We conclude that in THP-1 cells and primary murine cells, SMAD4 signaling is required for maximal induction of endotoxin tolerance via modulation of SHIP1 and IRAK-M.