Bone Morphogenetic Protein (BMP) signalling is an evolutionary conserved pathway, which functions to regulate numerous developmental processes such as cell fate determination and cellular proliferation. In Drosophila melanogaster, the ortholog of the vertebrate BMP2/4 is Decapentaplegic (Dpp). The most extensively characterised role of Dpp signalling in Drosophila is embryonic Dorsal-Ventral patterning. In this developmental environment, the Dpp morphogen acts as a step gradient to specify different concentration thresholds for target gene activation. The resulting nested domains of target gene expression in the embryo cooperate to induce the formation and subsequent maintenance of a simple extra-embryonic tissue, the amnioserosa. The amnioserosa tissue acts as an ideal model tissue to study Dpp-regulated differentiation. This study aims to identify and validate new targets of Dpp signalling, which are required for determining cell fate and differentiation of the amnioserosa tissue during embryogenesis. Additionally, this study aims to identify new regulators of the core signalling pathway. The work presented here was performed using a two tiered approach to understand in more detail the processes that regulate BMP-responsive transcription and the downstream effects. Firstly, RNA-Sequencing was performed on embryos with ectopic Dpp signalling in the early embryo. BMP-responsive target genes were idenitifed as differentially expressed when compared to control embryos. Expression studies have validated novel Dpp target genes and the list of genes that are regulated by BMP signalling has now been expanded. It can be invoked that these genes are involved in specification and/or mainentance of the amnioserosa tissue. Furthermore, I have uncovered a putative multi-tiered mechanism that exists between the Dpp and EGF signalling pathways to thus ensure correct cell fate specification and fine tuning of the Dpp signal in the Drosophila embryo. To further investigate how BMP signalling mediates such transcriptional regulation, a genome-wide RNAi screen was designed and performed to identify novel regulators of BMP transcription. Analysis of the screen data has identified a putative link between BMP-regulated transcription and transcriptional effectors of the Hippo signalling pathway, Scalloped and Yorkie. The data presented here suggests a co-regulatory requirement of these transcription factors to mediate Smad-dependent transcription.