The BMP signaling pathway has a conserved role in dorsal-ventral axis patterning during embryonic development. In Drosophila, graded BMP signaling is transduced by the Mad transcription factor and opposed by the Brinker repressor. In this study, using the Drosophila embryo as a model, we combine RNA-seq with Mad and Brinker ChIP-seq to decipher the BMP-responsive transcriptional network underpinning differentiation of the dorsal ectoderm during dorsal-ventral axis patterning. We identify multiple new BMP target genes, including positive and negative regulators of EGF signaling. Manipulation of EGF signaling levels by loss- and gain-of-function studies reveals that EGF signaling negatively regulates embryonic BMP-responsive transcription. Therefore, the BMP gene network has a self-regulating property in that it establishes a balance between its activity and that of the antagonistic EGF signaling pathway to facilitate correct patterning. In terms of BMP-dependent transcription, we identify key roles for the Zelda and Zerknüllt transcription factors in establishing the resulting expression domain, and find widespread binding of insulator proteins to the Mad and Brinker-bound genomic regions. Analysis of embryos lacking the BEAF-32 insulator protein shows reduced transcription of a peak BMP target gene and a reduction in the number of amnioserosa cells, the fate specified by peak BMP signaling. We incorporate our findings into a model for Mad-dependent activation, and discuss its relevance to BMP signal interpretation in vertebrates.