The microstructural changes induced by shear in dilute suspensions of colloidal Fe2O3 rods (aspect ratio = 8.4) have been studied using a novel rheo-optic technique. The large extinction coefficient for the hematite system at the wavelength used (lambda = 392 nm) enables rheo-optic experiments on truly dilute suspensions to be undertaken. The elimination of any particle-particle interactions ensures that the measurements obtained can be directly related to the induced physical changes of the isolated particles. Optical absorbance spectra have been measured over a range of shear rates and angle of light polarization relative to the shear direction. The measured absorbance changes can be directly attributed to the sheer-induced anisotropy in the suspension due to particle alignment. The results indicate that the hematite particles align with the direction of shear. The transition in the particle orientation is observed from a random Brownian-dominated system at Pe < 3, to a more ordered system under shear at Pe > 60. Plateau values in the measured spectra are observed at high Peclet numbers, indicating that a limiting degree of particle orientation occurs. Convergence of the observed extinction coefficients to zero at a polarization angle of similar to 55 degrees is seen at high Peclet numbers.