Objective To study the differentiation and neoplastic transformation by retrovirus infection of 12 d visceral yolk sac (VYS) of rats in vitro and in vivo. Methods Under various cultrue conditions and at different transplant sites in vivo, the differentiation of rat VYS was investigated. The VYS was transfected by retroviral vector carrying green fluorescent protein (EGFP) gene. The positive clones selected by G418 in vitro were re-implanted into syngenic rats or immunodeficiency mice in vivo. Results The VYS showed totipotency to differentiate into ectoderm, mesoderm and endoderm, but did not become committed to a particular cell lineage under whatever culture conditions or the implantion sites in the present experiment. Green fluorescent protein was successfully labelled into cloned VYS cells. When a large amount of labelled cells were innoculated s.c. into nude mice, mesenchymal neoplasm developed with GFP positive indicating VYS origin.