The segregation and myelination of axons in the developing PNS, results from a complex series of cellular and molecular interactions between Schwann cells and axons. Previously we identified the Lgi4 gene (leucine-rich glioma-inactivated4) as an important regulator of myelination in the PNS, and its dysfunction results in arthrogryposis as observed in claw paw mice. Lgi4 is a secreted protein and a member of a small family of proteins that are predominantly expressed in the nervous system. Their mechanism of action is unknown but may involve binding to members of the Adam (A disintegrin and metalloprotease) family of transmembrane proteins, in particular Adam22. We found that Lgi4 and Adam22 are both expressed in Schwann cells as well as in sensory neurons and that Lgi4 binds directly to Adam22 without a requirement for additional membrane associated factors. To determine whether Lgi4-Adam22 function involves a paracrine and/or an autocrine mechanism of action we performed heterotypic Schwann cell sensory neuron cultures and cell type-specific ablation of Lgi4 and Adam22 in mice. We show that Schwann cells are the principal cellular source of Lgi4 in the developing nerve and that Adam22 is required on axons. Our results thus reveal a novel paracrine signaling axis in peripheral nerve myelination in which Schwann cell secreted Lgi4 functions through binding of axonal Adam22 to drive the differentiation of Schwann cells.