Systematically annotating function of enzymes that belong to large protein families encoded in a single eukaryotic genome is a very challenging task. We carried out such an exercise to annotate function for serine-protease family of the trypsin fold in Drosophila melanogaster, with an emphasis on annotating serine-protease homologues (SPHs) that may have lost their catalytic function. Our approach involves data mining and data integration to provide function annotations for 190 Drosophila gene products containing serine-protease-like domains, of which 35 are SPHs. This was accomplished by analysis of structure-function relationships, gene-expression profiles, large-scale protein-protein interaction data, literature mining and bioinformatic tools. We introduce functional residue clustering (FRC), a method that performs hierarchical clustering of sequences using properties of functionally important residues and utilizes correlation co-efficient as a quantitative similarity measure to transfer in vivo substrate specificities to proteases. We show that the efficiency of transfer of substrate-specificity information using this method is generally high. FRC was also applied on Drosophila proteases to assign putative competitive inhibitor relationships (CIRs). Microarray gene-expression data were utilized to uncover a large-scale and dual involvement of proteases in development and in immune response. We found specific recruitment of SPHs and proteases with CLIP domains in immune response, suggesting evolution of a new function for SPHs. We also suggest existence of separate downstream protease cascades for immune response against bacterial/fungal infections and parasite/parasitoid infections. We verify quality of our annotations using information from RNAi screens and other evidence types. Utilization of such multi-fold approaches results in 10-fold increase of function annotation for Drosophila serine proteases and demonstrates value in increasing annotations in multiple genomes.