Fine structural correlates and functional parameters were measured in pinealectomized rats following grafting of the pineal gland into the third cerebral ventricle. Pinealectomy caused a significant decrease in serum melatonin concentration of animals compared to that in normal controls. No significant difference was observed in the serum melatonin concentration between pinealectomized rats and those receiving sham transplantation with fragments of occipital cortex. By 6 weeks nearly 50% of pinealectomized rats receiving pineal transplants demonstrated a significant increase in the serum melatonin concentration in contrast to that of pinealectomized rats and pinealectomized animals receiving sham transplants. Pinealocytes survived and flourished following transplantation from the epithalamic region to the third cerebral ventricle of the hypothalamus in host rats. These cells were found to be arranged individually or in clusters surrounding fenestrated capillaries of the graft. Moreover, these pinealocytes demonstrated ultrastructural features indicative of an active secretory process, including dense-core and clear vesicles as well as vacuoles containing flocculent material. Additional characteristics distinctive of normal control pinealocytes were observed in surviving cells of grafts, such as synaptic ribbons, synaptic ribbon fields, and myeloid bodies. Bundles of unmyelinated axons and apparent adrenergic nerve endings were observed with transmission electron microscopy and immunocystochemistry using antisera against tyrosine hydroxylase (TH). Nerve fibers and terminals were found within perivascular spaces surrounding fenestrated capillaries of viable grafts. These reported observations suggest that a significant population of transplanted pinealocytes recover functional activity (e.g., heightened melatonin secretion) following stereotaxic grafting into the third cerebral ventricles of pinealectomized animals. This apparent recovery of function may be linked directly to reinnervation of the gland by nerve fibers that appear to arise from the underlying median eminence.