Mutations in the Drosophila tolloid (tld) gene lead to a partial transformation of dorsal ectoderm into ventral ectoderm. The null phenotype of tld is similar to, but less severe than decapentaplegic (dpp), a TGF-beta family member required for the formation of all dorsal structures. We have cloned the tld locus by P element tagging. At the blastoderm stage, tld RNA is expressed dorsally, similar to that described for dpp. Analysis of a tld cDNA reveals three sequence motifs: an N terminal region of similarity to a metalloprotease, two EGF-like repeats, and five copies of a repeat found in human complement proteins C1r and C1s. tld sequence is 41% identical to human bone morphogenetic protein 1 (BMP-1); the closest members to dpp within the TGF-beta superfamily are BMP-2 and BMP-4, two other bone morphogenetic proteins. These findings suggest that these genes are members of a signal generating pathway that has been conserved between insects and mammals.