We determined the nucleotide sequence of genomic DNA corresponding to the yellow gene. The limits of the transcribed region were deduced from sequence analysis of yellow larval and pupal cDNA clones. The yellow transcription unit is simple, composed of two exons which are processed identically in both developmental stages into a mRNA of 1990 bp. The predicted yellow protein has a mol. wt of 60,752 daltons and appears to be a secreted protein having a structural function and not an enzymatic role in pigmentation. We also characterized the spontaneous mutation y2 and a revertant of this allele to investigate the mutagenic effect of the gypsy element inserted into this locus. Our results show that this transposon is inserted at -700 bp and that the y2+ revertant resulted from excision of the gypsy element leaving behind a complete long terminal repeat (LTR). We conclude, therefore, that the gypsy element is neither inserted into a pupal specific intron or regulatory sequence supporting the hypothesis that mutagenesis is a result of transcriptional interference by the gypsy element on the yellow gene.