TED (transposable element D) is an env-containing member of the gypsy family of retrotransposons that represents a possible retrovirus of invertebrates. This lepidopteran (moth) retroelement contains gag and pol genes that encode proteins capable of forming viruslike particles (VLP) with reverse transcriptase. Since VLP are likely intermediates in TED transposition, we investigated the roles of gag and pol in TED capsid assembly and maturation. By using constructed baculovirus vectors and TED Gag-specific antiserum, we show that the principal translation product of gag (Pr55(gag)) is cleaved to produce a single VLP structural protein, p37(gag). Replacement of Asp436 within the retrovirus-like active site of the pol-encoded protease (PR) abolished Pr55(gag) cleavage and demonstrated the requirement for PR in capsid processing. As shown by expression of an in-frame fusion of TED gag and pol, PR is derived from the Gag-Pol polyprotein Pr195(gag-pol). The PR cleavage site within Pr55(gag) was mapped to a position near the junction of a basic, nucleocapsid-like domain and a C-terminal acidic domain. Once released by cleavage, the C-terminal fragment was not detected. This acidic fragment was dispensable for VLP assembly, as demonstrated by the formation of VLP by C-terminal Pr55(gag) truncation proteins and replacement of the acidic domain with a heterologous protein. In contrast, C-terminal deletions that extended into the adjacent nucleocapsid-like domain of Pr55(gag) abolished VLP recovery and demonstrated that this central region contributes to VLP assembly or stability, or both. Collectively, these data suggest that the single TED protein p37(gag) provides both capsid and nucleocapsid functions. TED may therefore use a simple processing strategy for VLP assembly and genome packaging.