The transforming growth factor-β (TGF-β) superfamily encompasses a large group of soluble extracellular proteins that are potent regulators of development in both vertebrates and invertebrates. Drosophila TGF-β family members include three proteins with homology to vertebrate bone morphogenetic proteins (BMPs): Decapentaplegic (Dpp), Screw, and Glass bottom boat-60A. Genetic studies of Dpp signaling led to the identification of Smad proteins as central mediators of signal transduction by TGF-β family members. Work in mammalian tissue culture has elucidated a biochemical model for signal transduction, in which activation of receptor serine–threonine kinase activity leads to phosphorylation of specific Smad proteins and translocation of heteromeric Smad protein complexes to the nucleus. Once in the nucleus Smad proteins interact with other DNA binding proteins to regulate transcription of specific target genes. Dissection of Dpp-response elements from genes expressed during embryonic mesoderm patterning and midgut morphogenesis provides important insights into the contributions of Smad proteins and tissue-specific transcription factors to spatial regulation of gene expression. Genetic studies in Drosophila are now expanding to include multiple BMP ligands and receptors and have uncovered activities not explained by the current signal transduction model. Identification of more ligand sequences and demonstration of a functional Drosophila activin-like signal transduction pathway suggest that all TGF-β signal transduction pathways are present in flies.