The nucleotide sequence of a 5' segment of the human genomic c-fms proto-oncogene suggested that recombination between feline leukemia virus and feline c-fms sequences might have occurred in a region encoding the 5' untranslated portion of c-fms mRNA. The polyprotein precursor gP180gag-fms encoded by the McDonough strain of feline sarcoma virus was therefore predicted to contain 34 v-fms-coded amino acids derived from sequences of the c-fms gene that are not ordinarily translated from the proto-oncogene mRNA. The (gP180gag-fms) polyprotein was cotranslationally cleaved near the gag-fms junction to remove its gag gene-coded portion. Determination of the amino-terminal sequence of the resulting v-fms-coded glycoprotein, gp120v-fms, showed that the site of proteolysis corresponded to a predicted signal peptidase cleavage site within the c-fms gene product. Together, these analyses suggested that the linked gag sequences may not be necessary for expression of a biologically active v-fms gene product. The gag-fms sequences of feline sarcoma virus strain McDonough and the v-fms sequences alone were inserted into a murine retroviral vector containing a neomycin resistance gene. Both constructs were biologically active when transfected into NIH 3T3 cells and produced morphologically transformed foci at equivalent efficiencies. When transfected into a cell line (psi 2) expressing complementary viral gene functions, G418-resistant (Neor) cells containing either of these vector DNAs produced high titers of transforming viruses. Analysis of proteins produced in cells containing the vector lacking gag gene sequences showed that gP180gag-fms was not synthesized, whereas normal levels of both immature gp120v-fms and mature gp140v-fms were detected. The glycoprotein was efficiently transported to the cell surface, and it retained wild-type tyrosine kinase activity. We conclude that a cryptic hydrophobic signal peptide sequence in v-fms was unmasked by gag deletion, thereby allowing the correct orientation and transport of the v-fms gene product within membranous organelles. It seems likely that the proteolytic cleavage of gP180gag-fms is mediated by signal peptidase and that the amino termini of gp140v-fms and the c-fms gene product are identical.