The gypsy element of Drosophila differs from most LTR retrotransposons in containing a third open reading frame that resembles retroviral env genes. The protein encoded by ORF3 is glycosylated and processed, like all retroviral envelope proteins. The protein is expressed at high levels in fly strains in which gypsy elements are active. In these strains the protein is found primarily in viral particles. When larvae of fly strains in which gypsy is normally inactive are exposed to sucrose gradient fractions containing these particles, a high level of gypsy insertion activity is observed in their progeny. Thus, gypsy has the expected properties of an insect retrovirus.