A variety of genetic evidence suggests that a gradient of Decapentaplegic (Dpp) activity determines distinct cell fates in the dorsal region of the Drosophila embryo, and that this gradient may be generated indirectly by an inverse gradient of the BMP antagonist Short gastrulation (Sog). It has been proposed that Sog diffuses dorsally from the lateral neuroectoderm where it is produced, and is cleaved and degraded dorsally by the metalloprotease Tolloid (Tld). Here we show directly that Sog is distributed in a graded fashion in dorsal cells and that Tld degradation limits the levels of Sog dorsally. In addition, we find that Dynamin-dependent retrieval of Sog acts in parallel with degradation by Tld as a dorsal sink for active Sog.