Bone morphogenetic proteins (BMPs) are bone-derived factors capable of inducing ectopic bone formation. Unlike other BMPs, BMP-1 is not like transforming growth factor-beta (TGF-beta), but it is the prototype of a family of putative proteases implicated in pattern formation during development in diverse organisms. Although some members of this group, such as Drosophila tolloid (TLD), are postulated to activate TGF-beta-like proteins, actual substrates are unknown, Procollagen C-proteinase (PCP) cleaves the COOH-propeptides of procollagens I, II, and III to yield the major fibrous components of vertebrate extracellular matrix. Here it is shown that BMP-1 and PCP are identical. This demonstration of enzymatic activity for a BMP-1/TLD-like protein links an enzyme involved in matrix deposition to genes involved in pattern formation.