It has been suggested that R. equi causes pulmonary disease in foals by persisting within the lung as a facultative intracellular parasite of alveolar macrophages. This paper describes an ultrastructural study of the intracellular events after ingestion of R. equi by foal alveolar macrophages, in an attempt to determine the mechanism of intracellular survival of R. equi. Secondary lysosomes of alveolar macrophages recovered from foals by bronchoalveolar lavage were labelled with electron-dense ferritin, and the cells were challenged with either viable or formalin-killed R. equi. After 0-, 3-, 8- or 24-h incubation, the cells were fixed and processed for electron microscopy. There was no evidence of phagosome-lysosome fusion after ingestion of either viable or non-viable R. equi by foal alveolar macrophages. Rhodococcus equi persisted and multiplied within dilated phagosomes, which were often lined by elongate microvillous structures. After 24-h incubation, 75% of the ingested bacteria were still structurally intact. Macrophages with ingested viable R. equi were irreversibly damaged and released intracellular bacteria into the surrounding medium. These data confirm that R. equi is a facultative intracellular parasite of foal alveolar macrophages and is able to persist and multiply within the phagosome, apparently inhibiting phagosome-lysosome fusion by some as yet unknown mechanism.