The rosy gene in Drosophila melanogaster codes for the enzyme xanthine dehydrogenase (XDH). Mutants that have no enzyme activity are characterized by a brownish eye color phenotype reflecting a deficiency in the red eye pigment. Xanthine dehydrogenase is not synthesized in the eye, but rather is transported there. The present report describes the ultrastructural localization of XDH in the Drosophila eye. Three lines of evidence are presented demonstrating that XDH is sequestered within specific vacuoles, the type II pigment granules. Histochemical and antibody staining of frozen sections, as well as thin layer chromatography studies of several adult genotypes serve to examine some of the factors and genic interactions that may be involved in transport of XDH, and in eye pigment formation. While a specific function for XDH in the synthesis of the red, pteridine eye pigments remains unknown, these studies present evidence that: (1) the incorporation of XDH into the pigment granules requires specific interaction between a normal XDH molecule and one or more transport proteins; (2) the structural integrity of the pigment granule itself is dependent upon the presence of a normal balance of eye pigments, a notion advanced earlier.