The cohesin complex is a chromosomal component required for sister chromatid cohesion that is conserved from yeast to man. The similarly conserved Nipped-B protein is needed for cohesin to bind to chromosomes. In higher organisms, Nipped-B and cohesin regulate gene expression and development by unknown mechanisms. Using chromatin immunoprecipitation, we find that Nipped-B and cohesin bind to the same sites throughout the entire non-repetitive Drosophila genome. They preferentially bind transcribed regions and overlap with RNA polymerase II. This contrasts sharply with yeast, where cohesin binds almost exclusively between genes. Differences in cohesin and Nipped-B binding between Drosophila cell lines often correlate with differences in gene expression. For example, cohesin and Nipped-B bind the Abd-B homeobox gene in cells in which it is transcribed, but not in cells in which it is silenced. They bind to the Abd-B transcription unit and downstream regulatory region and thus could regulate both transcriptional elongation and activation. We posit that transcription facilitates cohesin binding, perhaps by unfolding chromatin, and that Nipped-B then regulates gene expression by controlling cohesin dynamics. These mechanisms are likely involved in the etiology of Cornelia de Lange syndrome, in which mutation of one copy of the NIPBL gene encoding the human Nipped-B ortholog causes diverse structural and mental birth defects.