All animals must coordinate growth rate and timing of maturation to reach the appropriate final size. Here, we describe hobbit, a novel and conserved gene identified in a forward genetic screen for Drosophila animals with small body size. hobbit is highly conserved throughout eukaryotes, but its function remains unknown. We demonstrate that hobbit mutant animals have systemic growth defects because they fail to secrete insulin. Other regulated secretion events also fail in hobbit mutant animals, including mucin-like 'glue' protein secretion from the larval salivary glands. hobbit mutant salivary glands produce glue-containing secretory granules that are reduced in size. Importantly, secretory granules in hobbit mutant cells lack essential membrane fusion machinery required for exocytosis, including Synaptotagmin 1 and the SNARE SNAP-24. These membrane fusion proteins instead accumulate inside enlarged late endosomes. Surprisingly, however, the Hobbit protein localizes to the endoplasmic reticulum. Our results suggest that Hobbit regulates a novel step in intracellular trafficking of membrane fusion proteins. Our studies also suggest that genetic control of body size, as a measure of insulin secretion, is a sensitive functional readout of the secretory machinery.