The Drosophila tolloid (tld) gene product belongs to a family of developmentally important proteins that includes bone morphogenetic protein-1 (BMP-1). In Drosophila, tld is required at the blastoderm stage to establish pattern within the dorsal half of the embryo. Genetic analysis suggests that the major function of tld is to augment the activity of the decapentaplegic gene product, a close relative of the TGF-beta superfamily members, BMP-2 and BMP-4. In this report, we describe a new gene called tolloid-related-1 (tlr-1) that maps immediately proximal to tld. Sequence analysis indicates that tlr-1 has a large N-terminal extension relative to tld, but otherwise shows the same general organization of sequence motifs found in tld and other BMP-1 family members. These include a region of similarity to astacin, a crayfish metalloprotease, five copies of a repeat first found in complement proteins C1r and C1s, and two copies of an epidermal growth factor-like sequence. In situ hybridization experiments show that tlr-1 expression partially overlaps tld expression in early embryos, but shows unique transcriptional patterns in late stage embryos that are not seen with tld. In larval stages, both genes are expressed in identical patterns in imaginal discs and in the optic lobes of the brain, but tlr-1 is more abundant than tld. Deletions that eliminate tlr-1 expression cause lethality during larval and pupal stages of development. A small proportion of homozygous mutant flies eclose and show wing veination defects. Transgenic animals in which a tlr-1 cDNA is driven by the tld promoter fail to rescue tld mutations, and extra copies of tld fail to rescue tlr-1 mutations, implying that these genes have evolved functionally distinct features. We propose that tld and tlr-1 arose by gene duplication and that each has evolved independently to acquire distinct tissue specific roles in Drosophila development.