Factor VII-activating protease (FSAP) is a circulating protease involved in the pathogenesis of atherosclerosis, calcification, and fibrotic processes. To understand how FSAP controls the balance of local growth factors, we have investigated its effect on the regulation of bone morphogenetic proteins (BMPs). BMP-2 is produced as a large pro-form and secreted as a mature heparin-binding growth factor after intracellular processing by pro-protein convertases (PCs). In this study, we discovered that FSAP enhances the biological activity of mature BMP-2 as well as its pro-form, as shown by osteogenic differentiation of C2C12 myoblasts. These findings were complemented by knockdown of FSAP in hepatocytes, which revealed BMP-2 processing by endogenous FSAP. N-terminal sequencing indicated that pro-BMP-2 was cleaved by FSAP at the canonical PC cleavage site, giving rise to mature BMP-2 (Arg(282)↓Gln(283)), as well as in the N-terminal heparin binding region of mature BMP-2, generating a truncated mature BMP-2 peptide (Arg(289)↓Lys(290)). Similarly, mature BMP-2 was also cleaved to a truncated peptide within its N-terminal region (Arg(289)↓Lys(290)). Plasmin exhibited a similar activity, but it was weaker compared with FSAP. Thrombin, Factor VIIa, Factor Xa, and activated protein C were not effective. These results were further supported by the observation that the mutation of the heparin binding region of BMP-2 inhibited the processing by FSAP but not by PC. Thus, the proteolysis and activation of pro-BMP-2 and mature BMP-2 by FSAP can regulate cell differentiation and calcification in vasculature and may explain why polymorphisms in the gene encoding for FSAP are related to vascular diseases.