To investigate the cellular mechanism of transformation by retroviruses, we established a system for isolation of cellular and viral mutants for transformation of a rat cell line. Mutagenized untransformed cells of this line were infected with recombinant murine retrovirus containing the src gene of Rous sarcoma virus and the selective marker gene, neo. After reaching confluence, cells transformed by the src gene tend to overgrow and die. Utilizing this property of src transformed rat cells and the selective marker gene, we could easily select untransformed cell clones containing the retrovirus genome. Expression of the src gene product in the flat clones selected was examined by in vitro assay of src kinase activity. To determine whether the mutations of these flat clones were viral or cellular, the susceptibilities of the clones to transformation were examined after superinfection with the wild-type virus and also characterized the retroviruses recovered from these clones. With this system, two novel clones were isolated. One had a defect in viral information affecting the transformed phenotype, but still retained src kinase activity like fully transformed cells. The other showed low src kinase activity but retained wild-type transforming virus, suggesting that a cellular gene involved in viral gene expression was mutated.