As the first neurons of the olfactory circuit, the olfactory receptor neurons (ORNs) detect environmental volatiles to provide input into the olfactory system. Information processing at the peripheral level could significantly shape the neural code that the brain receives to generate proper behavior, which is vital for the survival of an animal in nature. In the Drosophila antenna, different subtypes of olfactory receptor neurons (ORNs) housed in the same sensory hair (sensillum) can inhibit each other non-synaptically. However, the mechanisms underlying this underexplored form of lateral inhibition remain unclear. Here I use recordings from pairs of sensilla impaled by the same tungsten electrode to demonstrate that direct electrical (“ephaptic”) interactions mediate lateral inhibition between ORNs. Intriguingly, within individual sensilla, I find that ephaptic lateral inhibition is asymmetric such that one ORN exerts greater influence onto its neighbor. Serial block-face scanning electron microscopy of genetically identified ORNs and circuit modeling indicate that asymmetric lateral inhibition reflects a surprisingly simple mechanism: the physically larger ORN in a pair corresponds to the dominant neuron in ephaptic interactions. Thus, morphometric differences between compartmentalized ORNs account for highly specialized inhibitory interactions that govern information processing at the earliest stages of olfactory coding. Besides ephaptic coupling, neuromodulation can also profoundly impact peripheral olfactory processing. To elucidate the molecular mechanisms that underlie olfactory neuromodulation in the periphery, I focused on Or47b ORNs, a pheromone responding neuronal type that undergoes age-dependent, sexually dimorphic neuromodulation. Sexual dimorphism in Drosophila courtship circuits requires the male-specific transcription factor FruM, which comprises three splice variants — FruMA, FruMB and FruMC. Multiple FruM isoforms are typically expressed in the same neuron; however, the functional significance of their co-expression remains underexplored. By focusing on fruM-positive olfactory receptor neurons (ORNs), I show that FruMB and FruMC are both required for males’ age-dependent sensitization to aphrodisiac olfactory cues. Interestingly, FruMB expression, but not FruMC, is upregulated with age, and overexpression of FruMB can confer elevated responses in courtship-promoting ORNs. Mechanistically, FruMB is upstream of PPK25, a DEG/ENaC subunit necessary for response amplification, while FruMC is upstream of PPK23, which is in turn required for PPK25 function. Together, these results illustrate how male-specific olfactory sensitization is synergistically regulated by different FruM isoforms — through cooperation of their respective downstream effectors, thus providing critical mechanistic insight into how co-expressed FruM isoforms jointly coordinate dimorphic neurophysiology. Interestingly, besides the age-dependent male-specific sensitization, I found that Or47b neurons in females also undergo sex-specific neuromodulation, that they decrease olfactory sensitivity after mating. Such modulation of Or47b ORN is also regulated by JH signaling, and is independent of sex peptide receptor. Behaviorally, the Or47b neuronal desensitization heightens the selectivity of mate choice for mated females compared to virgins. Taken together, my thesis projects uncover mechanisms underlying peripheral olfactory processing: 1) asymmetric ephaptic interactions between ORNs housed within the same sensillum, which underlies the principle of olfactory information processing at periphery; and 2) context-dependent, sexually dimorphic neuromodulations in pheromone-sensing ORNs, which permits coordination of animals’ behaviors with their physiological states. These findings thus highlight the importance of ORNs as the site of neuromodulation to shape information input to higher-level olfactory circuits.