Dead neurons and degenerated neuronal branches in the nervous system must be swiftly cleared to avoid interference with regeneration and potential neuroinflammation. Phagocytes recognize “eat-me” signals displayed by degenerating neurons and remove cell corpses and debris by engulfment and digestion. Phosphatidylserine (PS) is the most prevalent and studied “eat-me” signal. PS is typically confined to the inner leaflet of the plasma membrane in healthy cells but externalizes to the outer leaflet upon cell death. Using dendritic arborization neurons of Drosophila larvae as a model, we previously identified neuronal PS exposure as a phagocyte-sensed “eat-me” signal during neurodegeneration. However, the presentation mechanism of PS and its functions beyond cell death in the neurons remains largely unknown. In this thesis, I found that Eato, an ABC transporter plays a dual role in neurite degeneration: it protects neurons from degeneration while sensitizing phagocytes to recognize and eliminate unhealthy neurons. Eato prevents PS exposure in healthy neurons, while enhancing phagocyte sensitivity to PS on neurons. The defects caused by Eato loss in both phagocytes are at least partially due to aberrant PS exposure. Additionally, PS exposure on phagocytes negatively regulates phagocytic activity. To study the role of PS in underappreciated physiological processes, I use the Drosophila larval neuromuscular junction (NMJ) as a model. I discovered PS exposure on extracellular vesicles (EVs) released from motor neurons and found that disruption of membrane lipid asymmetry is critical for EV production. EV biogenesis is controlled by the ESCRT complex, whose loss in motor neurons causes membrane trafficking arrest, excess bouton growth, and EV elimination. These EVs are phagocytosed by muscles, with Orion identified as a bridging molecule between PS on EVs and Draper on recipient cells. Specifically, Orion isoform A mediates this interaction, enabling EV uptake by muscle cells. In summary, this work highlights novel and diverse roles of PS in the nervous system, demonstrating its function not only as a degeneration signal but also in regulating other critical physiological processes.