To establish the differentiation potential of progenitor cells, non-parenchymal epithelial cells from the F344 rat liver (FNRL cells) were studied. These cells reacted with the OV-6 antibody marker of oval cells, but were negative for hepatocyte markers (albumin, transferrin, glycogen, glucose-6-phosphatase, H4 antigen), biliary markers (gamma glutamyl transpeptidase, cytokeratin-19), and alpha-fetoprotein, although exposure to sodium butyrate induced nascent albumin and alpha-fetoprotein mRNA transcription. When stably transduced, FNRL cells expressed a retroviral promotor-driven lacZ reporter in vitro, similar to transgene expression in hepatocyte-derived HepG2 cells. However, lacZ expression in FNRL cells was rapidly extinguished in intact animals, whereas the reporter remained active in HepG2 cells. Transplanted FNRL cells showed copious glucose-6-phosphatase expression; however, the cell differentiation programme remained incomplete, despite two-thirds partial hepatectomy, D-galactosamine treatment or bile duct ligation. Interestingly, lacZ expression resumed in cultures of FNRL cells explanted from recipients. Moreover, lacZ expression was down-regulated by gamma-interferon in FNRL cells, without affecting lacZ activity in HepG2 cells. The data indicate that although subpopulations of oval cells may not fully differentiate into mature hepatocytes, these cells might serve critical functions, such as glucose utilization, and help survival after liver injury. Also, introduced genes may be regulated in progenitor cells at multiple levels, including by interactions between regulatory sequences, differentiation-specific cellular factors, and extracellular signals; in vivo studies are thus especially important for analysing gene regulation in progenitor cells.