Insertional activation of host proto-oncogenes has been recognized as a basic mechanism by which nonacute retroviruses induce cancer. Our previous work has demonstrated that retroviruses can efficiently integrate into DNA virus genomes. Specifically, coinfection of cultured fibroblasts with a chicken herpesvirus, Marek's disease virus (MDV), and a chicken retrovirus results in frequent stable retroviral insertions into the herpesvirus genome. Such insertions could alter the expression of herpesvirus genes, possibly resulting in novel phenotypic properties. In this article, we report the characterization of a replication-competent clone of MDV with integrated retroviral sequences. This virus was isolated from a chicken following injection of fibroblasts coinfected with MDV and the retrovirus, reticuloendotheliosis virus. Transcripts originating from the reticuloendotheliosis virus long terminal repeat promoters were found to encode the adjoining MDV genes, SORF2, US1, and US10. This virus replicates well in culture but has an unusual phenotype in chickens, characterized by an attenuated virulence which produces no nerve lesions but, rather, severe thymic atrophy. While the causal relationship between the insertion and the observed phenotypes remains to be established, our data provide the first evidence of retroviral insertional activation of herpesvirus genes.