Establishment of the dorsal-ventral (DV) axis of the Drosophila embryo depends on ventral activation of the maternal Toll pathway, which creates a gradient of the NFkB/c-rel-related transcription factor dorsal. Signaling through the maternal BMP pathway also alters the dorsal gradient, probably by regulating degradation of the IkB homologue Cactus. The BMP4 homologue decapentaplegic (dpp) and the BMP antagonist short gastrulation (sog) are expressed by follicle cells during mid-oogenesis, but it is unknown how they affect embryonic patterning following fertilization. Here, we provide evidence that maternal Sog and Dpp proteins are secreted into the perivitelline space where they remain until early embryogenesis to modulate Cactus degradation, enabling their dual function in patterning the eggshell and embryo. We find that metalloproteases encoded by tolloid (tld) and tolkin (tok), which cleave Sog, are expressed by follicle cells and are required to generate DV asymmetry in the Dpp signal. Expression of tld and tok is ventrally restricted by the TGF-alpha ligand encoded by gurken, suggesting that signaling via the EGF receptor pathway may regulate embryonic patterning through two independent mechanisms: by restricting the expression of pipe and thereby activation of Toll signaling and by spatially regulating BMP activity.