The induction of spongiform myeloencephalopathy by murine leukemia viruses is mediated primarily by infection of central nervous system (CNS) microglia. In this regard, we have previously shown that CasBrE-induced disease requires late, rather than early, virus replication events in microglial cells (W. P. Lynch et al., J. Virol. 70:8896-8907, 1996). Furthermore, neurodegeneration requires the presence of unique sequences within the viral env gene. Thus, the neurodegeneration-inducing events could result from microglial expression of retroviral envelope protein alone or from the interaction of envelope protein with other viral structural proteins in the virus assembly and maturation process. To distinguish between these possible mechanisms of disease induction, we engineered the engraftable neural stem cell line C17-2 into packaging/producer cells in order to deliver the neurovirulent CasBrE env gene to endogenous CNS cells. This strategy resulted in significant CasBrE env expression within CNS microglia without the appearance of replication competent virus. CasBrE envelope expression within microglia was accompanied by increased expression of activation markers F4/80 and Mac-1 (CD11b) but failed to induce spongiform neurodegenerative changes. These results suggest that envelope expression alone within microglia is not sufficient to induce neurodegeneration. Rather, microglia-mediated disease appears to require neurovirulent Env protein interaction with other viral proteins during assembly or maturation. More broadly, the results presented here prove the efficacy of a novel method by which neural stem cell biology may be harnessed for genetically manipulating the CNS, not only for studying neurodegeneration but also as a paradigm for the disseminated distribution of retroviral vector-transduced genes.