Vacuole inheritance is temporally coordinated with the cell cycle and is restricted spatially to an axis between the maternal vacuole and the bud. The new bud vacuole is founded by a stream of vacuole-derived membranous vesicles and tubules which are transported from the mother cell into the bud to form the daughter organelle. We now report in vitro formation of vacuole-derived tubules and vesicles. In semi-intact cells, formation of tubulovesicular structures requires ATP and the proteins encoded by VAC1 and VAC2, two genes which are required for vacuole inheritance in vivo. Isolation of vacuoles from cell lysates before in vitro incubation reveals that formation of tubulovesicular structures requires cytosol as well as ATP. After forming tubulovesicular structures, isolated vacuoles subsequently increase in size. Biochemical assays reveal that this increase results from vacuole to vacuole fusion, leading to mixing of organellar contents. Intervacuolar fusion is sensitive to the phosphatase inhibitors microcystin-LR and okadaic acid, suggesting that protein phosphorylation/dephosphorylation reactions play a role in this event.