Abstract A 40-kb region around the rosy and snake loci was analyzed for restriction map variation among 60 lines of Drosophila melanogaster and 30 lines of Drosophila simulans collected together at a single locality in Raleigh, North Carolina. DNA sequence variation in D. simulans was estimated to be 6.3 times greater than in D. melanogaster (heterozygosities per nucleotide of 1.9% vs. 0.3%). This result stands in marked contrast to results of studies of phenotypic variation including proteins (allozymes), morphology and chromosome arrangements which are generally less variable and less geographically differentiated in D. simulans. Intraspecific polymorphism is not distributed uniformly over the 40-kb region. The level of heterozygosity per nucleotide varies more than 12-fold across the region in D. simulans, being highest over the hsc2 gene. Similar, though less extreme, variation in heterozygosity is also observed in D. melanogaster. Average interspecific divergence (corrected for intraspecific polymorphism) averaged 3.8%. The pattern of interspecific divergence over the 40-kb region shows some disparities with the spatial distribution of intraspecific variation, but is generally consistent with selective neutrality predictions: the most polymorphic regions within species are generally the most divergent between species. Sequence-length polymorphism is observed for D. melanogaster to be at levels comparable to other gene regions in this species. In contrast, no sequence length variation was observed among D. simulans chromosomes (limit of resolution approximately 100 bp). These data indicate that transposable elements play at best a minor role in the generation of naturally occurring genetic variation in D. simulans compared to D. melanogaster. We hypothesize that differences in species effective population size are the major determinant of the contrasting levels and patterns of DNA sequence and insertion/deletion variation that we report here and the patterns of allozyme and morphological variation and differentiation reported by other workers for these two species.