Amyloid precursor protein (APP) processing and the generation of beta-amyloid peptide (Abeta) are important in the pathogenesis of Alzheimer's disease. Although this has been studied extensively at the molecular and cellular levels, much less is known about the mechanisms of amyloid accumulation in vivo. We transplanted transgenic APP23 and wild-type B6 embryonic neural cells into the neocortex and hippocampus of both B6 and APP23 mice. APP23 grafts into wild-type hosts did not develop amyloid deposits up to 20 months after grafting. In contrast, both transgenic and wild-type grafts into young transgenic hosts developed amyloid plaques as early as 3 months after grafting. Although largely diffuse in nature, some of the amyloid deposits in wild-type grafts were congophilic and were surrounded by neuritic changes and gliosis, similar to the amyloid-associated pathology previously described in APP23 mice. Our results indicate that diffusion of soluble Abeta in the extracellular space is involved in the spread of Abeta pathology, and that extracellular amyloid formation can lead to neurodegeneration.