Transformation of 6-d-old embryonic chicken retinal cells by Rous sarcoma virus (RSV) was found to cause significant changes in several cellular properties including adhesiveness, motility, and state of differentiation. The alterations in cell adhesivity were analyzed by means of specific antibodies to the calcium-independent neural cell adhesion molecule, N-CAM. In the RSV-transformed cells the amount of N-CAM present at the cell surface was significantly decreased relative to normal cells, as assessed by immunofluorescent staining, specific immunoprecipitation, and immunoblotting experiments. This decrease was reflected in a marked reduction in N-CAM-mediated adhesiveness measured in vitro. A different, calcium-dependent, adhesive system also present on neurons was not detectably altered by RSV transformation and, in contrast with previous studies on normal neurons, this adhesive system was detected without treatment by proteases. In culture, the transformed cells formed fewer and less compact colonies than the normal retinal cells. Observation of the RSV-transformed retinal cells by time-lapse cinematography confirmed the reduction in adhesiveness and also revealed that the transformed cells were more highly motile than their normal counterparts. In addition, RSV transformation appeared to alter the differentiation of the cultured retinal cells. Immunofluorescent staining studies indicated that in contrast to mature neurons, transformed neural retinal cells expressed the 34,000-mol-wt tyrosine kinase substrate and reduced amounts of a neuron-specific ganglioside recognized by monoclonal antibody A2B5. These characteristics are shared by untransformed glial cells. In double immunofluorescent staining experiments, many cells expressed both N-CAM and pp60src shortly after viral infection, which implies that the N-CAM-positive neuroepithelial cells were transformed by RSV. In addition, a highly purified population of N-CAM-positive neural retinal cells, selected using a fluorescence-activated cell sorter, was rapidly and extensively transformed by RSV at rates comparable to those of the unfractionated population. These results established that the transformed cells were largely derived from RSV-infected neuroepithelial cells rather than from a small population of retinal glial cells present in the primary culture. The findings suggest reconsideration of the possible origin of tumors classified by morphological criteria as derived from glia and raise the possibility that the normal homologue of pp60src may play a role in the commitment of neuroepithelial cells to neuronal or glial differentiation pathways.