Using a neural transplantation model which mimics structural and functional properties of the normal rat brain to a high extent, we have taken a novel approach to study the transforming potential of activated oncogenes in the developing brain. Single cell suspensions prepared from fetal rat brains were infected with replication-defective retroviral vectors encoding oncogenes and stereotaxically injected into the caudoputamen of adult F344 rats. Rats carrying transplants expressing the polyoma middle T antigen developed endothelial hemangiomas in the graft which in 70% of the recipient animals led to fatal cerebral hemorrhage within 13-50 days after transplantation. Expression of the v-src gene caused astrocytic and mesenchymal tumors with a 70% incidence after latency periods of 2-6 months, but no endothelial lesions. It was found by in situ hybridization that these oncogenes are expressed in all cell types present in the graft. This indicates that cell-type specific transformation is due to differential susceptibility of the respective target cell to the oncogenes, rather than selective integration or expression of the retroviral construct. The highly efficient gene transfer by retroviral vectors into fetal brain transplants provides a challenging experimental strategy to study differentiation and oncogenesis in the CNS.