Evidence is accumulating that small RNAs processed from both host genomic sources and exogenous, viral, double stranded RNAs are biologically active in pathways that downregulate translation and increase degradation of specific transcripts in eukaryotic cells. Here, the mechanisms of small RNA production and processing in Drosophila melanogaster are described, and recent evidence that these pathways are involved in a pathogen-specific, systemic innate immune response is summarised. Small interfering RNAs (siRNAs) processed from viral dsRNAs are presented in the cell as templates to enable sequence-specific silencing of complementary viral transcripts in infected insect cells. Further, there is evidence that, as part of the ongoing immunological arms race between host and pathogen, insect viruses have evolved means to disrupt or subvert the host siRNA pathway.