We have characterized the v-erbA and v-erbB oncogenes of td359, a transformation-defective mutant of avian erythroblastosis virus (AEV) unable to transform erythroblasts, and the revertant r12, obtained after in vivo passage of the mutant. Molecular cloning, sequencing, construction of chimeric viruses and testing of their oncogenic capacities revealed that both oncogenes of td359 are mutated and biologically defective. The r12 virus, although still containing a mutant v-erbB gene, recovered its erythroid transforming potential by acquiring a highly active gag-erbA gene. These results demonstrate that two co-operating oncogenes, an active v-erbA and a defective v-erbB, can transform a cell type not transformed by either oncogene alone. Furthermore, a single amino acid substitution inactivated the td359 v-erbA protein and we show that its reversion led to the reactivation of the protein. This lesion is located in the same region as several previously described inactivating mutations of glucocorticoid receptors, suggesting that the structure/function relationship of the virally transduced form of the c-erbA/thyroid hormone receptor is closely similar to that of steroid hormone receptors.