The scalloped (sd) gene of Drosophila melanogaster was initially characterized by mutants affecting structures on the wing of the adult fly. The sequence of a cDNA clone of the gene reveals a predicted protein sequence homologous to that of a human transcriptional enhancer factor, TEF-1 (68% identity). The homology includes a sequence motif, the TEA domain, that was shown previously to be a DNA-binding domain of TEF-1. An sd enhancer trap strain expresses the reporter gene in a subset of neuroblasts in the central nervous system and in the peripheral sense organs of the embryo. The reporter gene is later expressed in specific regions of the imaginal discs, including regions of the wing disc destined to become structures defective in viable sd mutants. Later still, expression in the adult brain is restricted to subsets of cells, some in regions involved in the processing of gustatory information. These observations indicate that the sd gene encodes a transcription factor that functions in the regulation of cell-specific gene expression during Drosophila development, particularly in the differentiation of the nervous system.