The Angiotensin-converting enzyme (Ance) gene of Drosophila melanogaster is a homologue of mammalian angiotensin-converting enzyme (ACE), a peptidyl dipeptidase implicated in regulation of blood pressure and male fertility. In Drosophila, Ance protein is present in vesicular structures within spermatocytes and immature spermatids. It is also present within the lumen of the testis and the waste bag, and is associated with the surface of elongated spermatid bundles. Ance mRNA is found mainly in large primary spermatocytes and is not detectable in cyst cells. Testes lacking germ cells have reduced levels of ACE activity, and no Ance protein is detectable by immunocytochemistry, indicating that the germ cells are the major site of Ance synthesis. Ance mutant testes lack individualised sperm and have very few actin-based individualisation complexes. Spermatid nuclei undergo scattering along the cyst and have abnormal morphology, similar to other individualisation mutants. Mutant spermatids also have abnormal ultrastructure with grossly defective mitochondrial derivatives. The failure of Ance mutant testes to form individualisation complexes may be due to a failure in correct spermatid differentiation. Taken together, the expression pattern and mutant phenotype suggest that Ance is required for spermatid differentiation, probably through the processing of a regulatory peptide synthesised within the developing cyst.