The transcription factors, Smad1, Smad5 and Smad8, are the pivotal intracellular effectors of the bone morphogenetic protein (BMP) family of proteins. BMPs and their receptors are expressed in the nervous system (NS) throughout its development. This review focuses on the actions of Smad 1/5/8 in the developing NS. The mechanisms by which these Smad proteins regulate the induction of the neuroectoderm, the central nervous system (CNS) primordium, and finally the neural crest, which gives rise to the peripheral nervous system (PNS), are reviewed herein. We describe how, following neural tube closure, the most dorsal aspect of the tube becomes a signalling centre for BMPs, which directs the pattern of the development of the dorsal spinal cord (SC), through the action of Smad1, Smad5 and Smad8. The direct effects of Smad 1/5/8 signalling on the development of neuronal and non-neuronal cells from various neural progenitor cell populations are then described. Finally, this review discusses the neurodevelopmental abnormalities associated with the knockdown of Smad 1/5/8.