Bone morphogenetic proteins (BMPs) induce osteoblast differentiation and bone formation. Smads, a group of functionally and structurally related intracellular effectors, mediate signaling initiated by BMPs and regulate cell definite commitment. Previously, we showed that Smad1 activates osteopontin and osteoprotegerin gene expression by dislodging Hoxc-8 from its DNA binding sites. A domain of Smad1, termed Smad1C, was characterized as interacting with Hoxc-8 and then crippling its DNA-binding ability. Ectopic expression of Smad1C is able to bypass BMP signaling in the induction of osteoblast differentiation and bone formation in vitro. To test the function of Smad1C on osteogenesis in vivo, we generated transgenic mice in which Smad1C expression was induced with doxycycline and localized in bone by using a tetracycline-inducible expression system (Tet-on) modified with a bone-specific gene promoter, type I collagen α1. The mice expressing Smad1C showed increased skeletal bone mineral density compared with their littermates. Bone histomorphometric analysis of mouse tibiae showed that Smad1C significantly increases trabecular bone area and length of trabecular surface covered with osteoid and up-regulates bone marker gene (OPN, Cbfa1, Col I α1, BSP, ALP) expression in vivo. Moreover, stromal cells isolated from mice expressing Smad1C displayed a higher potential for differentiating into osteoblasts than the other mice. These results indicate that Smad1C mimics BMPs in the induction of osteogenesis in vivo. Most important, using a high throughput screening assay based on mimicking Smad1C's displacement of Hoxc-8 binding to DNA, we identified chemical entities that exhibit bone anabolic activity in cell and bone organ cultures, suggesting the possibility that the compounds may be used as bone anabolic agents to treat bone pathologies.