Axonal insulation is critical for efficient action potential propagation and normal functioning of the nervous system. In Drosophila, the underlying basis of nerve ensheathment is the axonal insulation by glial cells and the establishment of septate junctions (SJs) between glial cell membranes. However, the details of the cellular and molecular mechanisms underlying axonal insulation and SJ formation are still obscure. Here, we report the characterization of axonal insulation in the Drosophila peripheral nervous system (PNS). Targeted expression of tau-green fluorescent protein in the glial cells and ultrastructural analysis of the peripheral nerves allowed us to visualize the glial ensheathment of axons. We show that individual or a group of axons are ensheathed by inner glial processes, which in turn are ensheathed by the outer perineurial glial cells. SJs are formed between the inner and outer glial membranes. We also show that Neurexin IV, Contactin, and Neuroglian are coexpressed in the peripheral glial membranes and that these proteins exist as a complex in the Drosophila nervous system. Mutations in neurexin IV, contactin, and neuroglian result in the disruption of blood-nerve barrier function in the PNS, and ultrastructural analyses of the mutant embryonic peripheral nerves show loss of glial SJs. Interestingly, the murine homologs of Neurexin IV, Contactin, and Neuroglian are expressed at the paranodal SJs and play a key role in axon-glial interactions of myelinated axons. Together, our data suggest that the molecular machinery underlying axonal insulation and axon-glial interactions may be conserved across species.