ABSTRACT Structurally unrelated neural inducers in vertebrate and invertebrate embryos have been proposed to function by binding to BMP4 or Dpp, respectively, and preventing these homologous signals from activating their receptor(s). In this study, we investigate the functions of various forms of the Drosophila Sog protein using the discriminating assay of Drosophila wing development. We find that misexpression of Drosophila Sog, or its vertebrate counterpart Chordin, generates a very limited vein-loss phenotype. This sog misexpression phenotype is very similar to that of viable mutants of glass-bottom boat (gbb), which encodes a BMP family member. Consistent with Sog selectively interfering with Gbb signaling, Sog can block the effect of misexpressing Gbb, but not Dpp in the wing. In contrast to the limited BMP inhibitory activity of Sog, we have identified carboxy-truncated forms of Sog, referred to as Supersog, which when misexpressed cause a broad range of dpp– mutant phenotypes. In line with its phenotypic effects, Supersog can block the effects of both misexpressing Dpp and Gbb in the wing. Vertebrate Noggin, on the other hand, acts as a general inhibitor of Dpp signaling, which can interfere with the effect of overexpressing Dpp, but not Gbb. We present evidence that Sog processing occurs in vivo and is biologically relevant. Overexpression of intact Sog in embryos and adult wing primordia leads to the developmentally regulated processing of Sog. This in vivo processing of Sog can be duplicated in vitro by treating Sog with a combination of the metalloprotease Tolloid (Tld) plus Twisted Gastrulation (Tsg), another extracellular factor involved in Dpp signaling. In accord with this result, coexpression of intact Sog and Tsg in developing wings generates a phenotype very similar to that of Supersog. Finally, we provide evidence that tsg functions in the embryo to generate a Supersog-like activity, since Supersog can partially rescue tsg– mutants. Consistent with this finding, sog– and tsg– mutants exhibit similar dorsal patterning defects during early gastrulation. These results indicate that differential processing of Sog generates a novel BMP inhibitory activity during development and, more generally, that BMP antagonists play distinct roles in regulating the quality as well as the magnitude of BMP signaling.