We report the insertion of the transposable element B104 in the Phenylalanine hydroxylase gene of the Drosophila mutant Henna-recessive 3. Its presence alters the Phenylalanine hydroxylase splicing pattern, producing at least two aberrant mRNAs which contain part of the B104 sequence interrupting the coding region. This aberrant splicing is provoked by the use of a cryptic donor site encoded by the B104 3' long terminal repeat in combination with either the gene intron 3 acceptor site or a novel acceptor site generated by the target duplication caused by transposition. One of them, referred as mRNA type 1, encodes a truncated protein that could be predictably non-functional. In mRNA type 2, in spite of a 42 nt insertion, the Phenylalanine hydroxylase reading frame is not altered and it would encode for a protein with 14 extra amino acids which would be able to account for the low enzyme activity detected in this mutant. These results demonstrated that Henna locus encodes the enzyme phenylalanine hydroxylase providing direct evidence of its participation in pteridine synthesis. Moreover, it constitutes an example of the ability of transposable elements to generate protein variation in populations with the evolutionary consequences that this implies.