Bone morphogenetic protein-4 (BMP-4) and its Drosophila ortholog, decapentaplegic (Dpp), are multifunctional developmental regulators. Both gain-of-function and loss-of-function studies demonstrate that the biological activity and signaling range of these morphogens must be strictly regulated to ensure normal embryonic patterning. BMP-4 and Dpp are produced from inactive precursors that are proteolytically cleaved, following which the active ligand is secreted into the extracellular space. Binding of BMP-4 or Dpp to its cognate receptor leads to phosphorylation of intracellular signal-transducing Smad proteins that then form hetero-oligomers, translocate to the nucleus and modulate transcription of target genes. Recent studies have shown that the BMP signal transduction cascade can be modulated at every step of this process.