The exoribonuclease Xrn1 is widely recognised as a key component in the 5'-3' RNA degradation pathway. This enzyme is highly conserved between yeast and humans and is known to be involved in RNA interference and degradation of microRNAs as well as RNA turnover. In yeast and human tissue culture cells, Xrn1 has been shown to be a component of P-bodies (processing bodies), dynamic cytoplasmic granules where RNA degradation can take place. In this paper we show for the first time that Pacman, the Drosophila homologue of Xrn1, is localized in cytoplasmic particles in Drosophila testis cells. These particles are present in both the mitotically dividing spermatogonia derived from primordial stem cells and in the transcriptionally active spermatocytes. Pacman is co-localized with the decapping activator dDcp1 and the helicase Me31B (a Dhh1 homologue) in these particles, although this co-localization is not completely overlapping, suggesting that there are different compartments within these granules. Particles containing Pacman respond to stress and depletion of 5'-3' decay factors in the same way as yeast P-bodies, and therefore are likely to be sites of mRNA degradation or storage. Pacman is shown to be required for normal Drosophila spermatogenesis, suggesting that control of mRNA stability is crucial in the testis differentiation pathway.