The envelope gene of HTLV-III, the retrovirus directly linked to AIDS, encodes a protein of 856 amino acids. Our sequence analysis of the cloned HTLV-III (HXB-3) env gene and its comparison with other isolates reveal significant divergence, especially in the external portion of this protein. A large segment of the env gene (1800 bp) was inserted into the expression vector pEV-vrf3, and a corresponding 68 kd protein, which encompasses both the extracellular and the membrane-associated regions of the native protein, was produced in E. coli. Several smaller polypeptides, which appear to be internal initiation products, were also produced. All 50 AIDS patient sera obtained from different locations in the United States specifically recognized the bacterially synthesized envelope proteins, as judged by Western blots. This suggests that these proteins will be useful for the diagnosis of HTLV-III infection and possibly as a vaccine against AIDS.