Members of the neprilysin family of neutral endopeptidases (M13) are typically membrane-bound enzymes known to be involved in the extra-cellular metabolism of signalling peptides and have important roles during mammalian embryogenesis. In this study we show that membranes prepared from embryos of Drosophila melanogaster possess neprilysin-like activity that is inhibited by phosphoramidon and thiorphan, both inhibitors of mammalian neprilysin. Unexpectedly, we also found strong neprilysin-like neutral endopeptidase activity in a soluble embryo fraction, which we identify as NEP2 by Western blot and immunoprecipitation experiments using NEP2 specific antibodies. NEP2 is a soluble secreted member of the neprilysin family that has been shown previously to be expressed in larval and adult Malpighian tubules and in the testes of adult males. In situ hybridization studies reveal expression at stage 10-11 in a pattern similar to that previously described for stellate cell progenitors of the caudal visceral mesoderm. In later stages of embryogenesis, some of these cells appear to migrate into the growing Malpighian tubule. Recombinant NEP2 protein is N-glycosylated and displays optimum endopeptidase activity at neutral pH, consistent with a role as an extracellular peptidase. The recombinant enzyme hydrolyses Drosophila tachykinin peptides (DTK) at peptide bonds N-terminal to hydrophobic residues. DTK2, like Locusta tachykinin-1, was cleaved at the penultimate peptide bond (Gly(7)-Leu(8)), whereas the other Drosophila peptides were cleaved centrally at Xxx-Phe bonds. However, the rates of hydrolysis of the latter substrates were much slower than the hydrolysis rates of DTK2 and Locusta tachykinin-1, suggesting that the interaction of the bulky side-chain of phenylalanine at the S'(1) sub-site is less favorable for peptide bond hydrolysis. The secretion of NEP2 from tissues during embryogenesis suggests a possible developmental role for this endopeptidase in peptide signalling in D. melanogaster.