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Two human papillomavirus type 16 (HPV 16)-immortalized human keratinocyte cell lines (HPK) were shown to have retained the ability for differentiation after subcutaneous injection into nude mice. These properties were maintained even at late passage. HPK cells gave rise to transiently growing cysts which exhibited an epitheliumlike architecture. Moreover, differentiation-specific markers such as cytokeratin 10, involucrin, and filaggrin were shown to be expressed in an ordered succession. RNA-RNA in situ hybridization revealed heterogeneous and low levels of HPV 16 E6-E7 RNA in the basal layer of the cysts. In contrast, in progressively growing tumors induced by HPK cells containing an activated ras oncogene (EJ-ras) or in tumors induced by the cervical carcinoma cell line CaSki, high levels of E6-E7-specific RNA could be detected. Irrespective of the growth potential of these cell lines in nude mice, viral transcription was always more evident in the basal layer and in proliferatively active cells rather than in differentiated cells. This contrasts with viral gene expression in HPV 16 positive low-grade cervical dysplasia, in which abundant viral transcriptional activity was mapped to the upper third of the epithelium. It is suggested that the physical state of the viral DNA, i.e., integrated viral DNA in the cell lines as opposed to extrachromosomal DNA in low-grade cervical dysplasia, may influence viral gene regulation.