To unravel the molecular mechanisms of peripheral nervous system differentiation in Drosophila, we have screened for and identified genes that are expressed in sensory mother cells. Here, we describe a novel gene, neuromusculin (nrm), that is expressed in sensory mother cells and developing muscles. nrm encodes a member of the immunoglobulin superfamily. Immunoblots of Schneider 2 cells transfected with an nrm cDNA indicate that Nrm is present in a membrane-associated form and a secreted form. Cell aggregation assays suggest that Nrm is a homophilic cell adhesion molecule that is secreted or released after proteolysis, a mechanism that to our knowledge has not been described for immunoglobulin-like molecules. Genetic analyses indicate that nrm is an essential gene required for larval viability. We propose that Nrm may play a role as a cell adhesion molecule in clustering cells of the peripheral nervous system, neuronal fasciculation, and/or pathfinding.