Skeletal homeostasis is determined by systemic hormones and local factors. Bone morphogenetic proteins (BMPs) are unique because they induce the commitment of mesenchymal cells toward cells of the osteoblastic lineage and also enhance the differentiated function of the osteoblast. BMP activities in bone are mediated through binding to specific cell surface receptors and through interactions with other growth factors. BMPs are required for skeletal development and maintenance of adult bone homeostasis, and play a role in fracture healing. BMPs signal by activating the mothers against decapentaplegic (Smad) and mitogen activated protein kinase (MAPK) pathways, and their actions are tempered by intracellular and extracellular proteins. The BMP antagonists block BMP signal transduction at multiple levels including pseudoreceptor, inhibitory intracellular binding proteins, and factors that induce BMP ubiquitination. A large number of extracellular proteins that bind BMPs and prevent their binding to signaling receptors have emerged. The extracellular antagonists are differentially expressed in cartilage and bone tissue and exhibit BMP antagonistic as well as additional activities. Both intracellular and extracellular antagonists are regulated by BMPs, indicating the existence of local feedback mechanisms to modulate BMP cellular activities.