The Drosophila tolloid (tld) and tolloid related (tlr) gene products belong to a family of developmentally important proteases that includes Bone Morphogenetic Protein 1 (Bmp1). Tld is required early in Drosophila development for proper patterning of dorsal embryonic structures, whereas Tlr is required later during larval and pupal stages of development. The major function of Tld is to augment the activity of Decapentaplegic (Dpp) and Screw (Scw), two members of the Bmp subgroup of the Tgfβ superfamily, by cleaving the Bmp inhibitor Short gastrulation (Sog). In this study, we provide evidence that Tlr also contributes to Sog processing. Tlr cleaves Sog in vitro in a Bmp-dependent manner at the same three major sites as does Tld. However, Tlr shows different site selection preferences and cleaves Sog with slower kinetics. To test whether these differences are important in vivo, we investigated the role of Tlr and Tld during development of the posterior crossvein (PCV) in the pupal wing. We show that tlr mutants lack the PCV as a result of too little Bmp signaling. This is probably caused by excess Sog activity, as the phenotype can be suppressed by lowering Sog levels. However, Tld cannot substitute for Tlr in the PCV; in fact, misexpressed Tld can cause loss of the PCV. Reducing levels of Sog can also cause loss of the PCV, indicating that Sog has not only an inhibitory but also a positive effect on signaling in the PCV. We propose that the specific catalytic properties of Tlr and Tld have evolved to achieve the proper balance between the inhibitory and positive activities of Sog in the PCV and early embryo, respectively. We further suggest that, as in the embryo, the positive effect of Sog upon Bmp signaling probably stems from its role in a ligand transport process.