During early embryogenesis of Drosophila the spatial and temporal expression patterns of the region-specific homeotic gene spalt (sal) and the neighbouring gene spalt adjacent (sala) extensively overlap. We show that the initial expression patterns of the two genes in the blastoderm also have identical genetic controls. However, while sal encodes a transcription factor, sala encodes a precursor protein from which a functional signal peptide is cleaved off to generate the secreted sala protein. Ectopic expression or absence of sala protein does not affect embryonic development, adult viability or fertility. In addition to sal and sala, we identified a third gene nearby, termed spalt related (salr), which shares coding sequence similarity and a late embryonic expression pattern with sal, but lacks the early expression domains that are shared by sal and sala. These results suggest that the three genes and their present cis-regulatory regions arose through a chromosomal rearrangement involving local duplication and transposition events in the 32F/33A region on the left arm of the second chromosome.