Myotonic dystrophy type 1 is an autosomal dominant disorder associated with the expansion of a CTG repeat in the 3' untranslated region (UTR) of the DMPK gene. Recent data suggest that pathogenesis is predominantly mediated by a gain of function of the mutant transcript. In patients, these expanded CUG repeat-containing transcripts are sequestered into ribonuclear foci that also contain the muscleblind-like proteins. To provide further insights into muscleblind function and the pathogenesis of myotonic dystrophy, we generated Drosophila incorporating CTG repeats in the 3'-UTR of a reporter gene. As in patients, expanded CUG repeats form discrete ribonuclear foci in Drosophila muscle cells that co-localize with muscleblind. Unexpectedly, however, foci are not observed in all cell types and muscleblind is neither necessary nor sufficient for their formation. The foci are dynamic transient structures with short half-lifes that do not co-localize with the proteasome, suggesting they are unlikely to contain mis-folded proteins. However, they do co-localize with non-A, the human orthologs of which are implicated in both RNA splicing and attachment of dsRNA to the nuclear matrix. Muscleblind is also revealed as having a previously unrecognized role in stabilizing CUG transcripts. Most interestingly, Drosophila expressing (CUG)162 repeats has no detectable pathological phenotype suggesting that in contrast to expanded polyglutamine-containing proteins, neither the expanded CUG repeat RNA nor the ribonuclear foci are directly toxic.