Endogenous retroviruses are a common ancestral feature of mammalian genomes with most having been inactivated over time through mutation and deletion(1). A group of more intact endogenous retroviruses are considered to have entered the genomes of some species more recently, through infection by exogenous viruses(2), but this event has never been directly proved. We have previously reported koala retrovirus (KoRV) to be a functional virus that is associated with neoplasia(3). Here we show that KoRV also shows features of a recently inserted endogenous retrovirus that is vertically transmitted. The finding that some isolated koala populations have not yet incorporated KoRV into their genomes, combined with its high level of activity and variability in individual koalas, suggests that KoRV is a virus in transition between an exogenous and endogenous element. This ongoing dynamic interaction with a wild species provides an exciting opportunity to study the process and consequences of retroviral endogenization in action, and is an attractive model for studying the evolutionary event in which a retrovirus invades a mammalian genome.