In vertebrates, the two-step peptide alpha-amidation reaction is catalyzed sequentially by two enzymatic activities contained within one bifunctional enzyme called PAM (peptidylglycine alpha-amidating mono-oxygenase). Drosophila head extracts contained both of these PAM-related enzyme activities: a mono-oxygenase (PHM) and a lyase (PAL). However, no bifunctional PAM protein was detected. We identified cDNAs encoding an active mono-oxygenase that is highly homologous to mammalian PHM. PHM-like immunoreactivity was found within diverse larval tissues, including the CNS, endocrine glands, and gut epithelium. Northern and Western blot analyses demonstrate RNA and protein species corresponding to the cloned PHM, but not to a bifunctional PAM, leading us to predict the existence of separate PHM and PAL genes in Drosophila. The Drosophila PHM gene displays an organization of exons that is highly similar to the PHM-encoding portion of the rat PAM gene. Genetic analysis was consistent with the prediction of separate PHM and PAL gene functions in Drosophila: a P element insertion line containing a transposon within the PHM transcription unit displayed strikingly lower PHM enzyme levels, whereas PAL levels were increased slightly. The lethal phenotype displayed by the dPHM P element insertion indicates a widespread essential function. Reversion analysis indicated that the lethality associated with the insertion chromosome likely is attributable to the P element insertion. These combined data indicate a fundamental evolutionary divergence in the genes coding for critical neurotransmitter biosynthetic enzymes: in Drosophila, the two enzyme activities of PAM are encoded by separate genes.