While analyzing gene expression in collagen-induced arthritis, we discovered that a poorly characterized gene, follistatin-like protein 1 (FSTL-1), is highly overexpressed in mouse paws during early arthritis, especially at the interface of synovial pannus and eroding bone. In this study, we show that FSTL-1 is a novel proinflammatory molecule with a previously unrecognized role in inflammation. Transfection of FSTL-1 into macrophages and fibroblasts leads to up-regulation of proinflammatory cytokines, including IL-1beta, TNF-alpha, and IL-6. Overexpression of FSTL-1 in mouse paws by gene transfer results in severe paw swelling and arthritis.