Keloids are proliferative dermal growths representing a pathologic wound healing response. We have previously demonstrated that coculture of fibroblasts derived from either keloid or normal skin have an elevated proliferation rate when cocultured with keloid-derived keratinocytes vs. normal keratinocytes. In these studies, we examined the contribution of transforming growth factor-beta (TGF-beta) to this phenomenon using a two-chamber coculture system. Fibroblast proliferation in coculture was slower with the addition of a pan-TGF-beta neutralizing antibody. Keloid keratinocytes in coculture expressed more TGF-beta1, -beta3, and TGF-beta receptor 1 than normal keratinocytes. Keloid fibroblasts cocultured with keloid keratinocytes expressed more mRNA for TGF-beta1, -beta2, TGF-beta receptor 1, and Smad2. Keloid fibroblasts also produced more type I collagen, connective tissue growth factor, and insulin-like growth factor-II/mannose-6-phosphate receptor when cocultured with keloid keratinocytes vs. normal keratinocytes. Levels of total and activated TGF-beta activity increased when fibroblasts were cocultured with keratinocytes, correlating with the changes in transcriptional activity of TGF-beta. In conclusion, we find a complex paracrine interaction regulates TGF-beta mRNA expression and activation between keratinocytes and fibroblasts. These data suggest that keloid pathogenesis may result from both an increased TGF-beta production and activation by the keloid keratinocyte, and elevated TGF-beta expression, utilization, and signaling in keloid fibroblasts.