Bone morphogenetic proteins (BMPs) are multifunctional proteins that regulate the fate of different cell types, including mesenchymal and endothelial cells. BMPs inhibit myogenic differentiation, but promote the differentiation of mesenchymal cells into osteoblasts. Furthermore, endothelial migration and tube formation are stimulated by BMPs. Like other members of the transforming growth factor-β (TGF-β) superfamily, BMPs elicit their cellular effects via specific types I and II serine/threonine receptors. The activated BMP type I receptor phosphorylates specific receptor-regulated (R)-Smad proteins, which assemble into heteromeric complexes with common partner (Co)-Smad4. Heteromeric Smad complexes efficiently translocate into the nucleus, where they regulate the transcription of target genes. Inhibitors of differentiation (Id) are genes that are specifically induced by BMPs in tissues of different origin. Promoter analysis of Id1 indicates three distinct sequence elements that are sufficient and essential for efficient BMP-induced activation. Furthermore, recent studies reveal an important effector function for Id1 in various BMP-induced biological responses.