Members of the oxysterol binding protein (OSBP) family are involved in diverse biological processes, including non-vesicular sterol transport and vesicle trafficking. The mechanisms by which OSBPs integrate functionally with developmental and physiological processes remain elusive. Here, we report the in vivo analysis of OSBP function in the model organism Drosophila. Osbp mutants are male-sterile and exhibit defects in individualization, the process by which each spermatid is packaged into its own membrane. Overexpression of OSBP leads to post-eclosion behaviour defects that can be suppressed by co-expression of endoplasmic reticulum-specific VAP family proteins. Most notably, FAN, a testis-specific VAP protein, acts together with OSBP genetically and physically to regulate the individualization process. OSBP-positive and sterol-enriched speckles are found at the leading edge of the individualization complex in wild type but not in Osbp or fan mutants, suggesting that sterol trafficking might play key roles during the membrane-remodelling phase of individualization. In addition, Osbp mutants that are fed additional sterols partially recover fertility, implying that male sterility is attributable to sterol shortage. Thus, we have identified an OSBP- and FAN-mediated sterol requirement in Drosophila spermatogenesis.