In the rat pancreas oval cells were shown to contain albumin transcripts and are considered to be precursors of pancreatic hepatocytes. Pancreatic oval cells have been maintained in our laboratory as a cell line. In the present study we have examined the differentiation potential of rat pancreatic epithelial oval cells under different culture conditions using light and electron microscopy and in situ hybridization techniques. Oval cells cultured on collagen gels formed a monolayer. However, when oval cells were embedded in collagen gels and cultured with or without fibroblasts, they readily organized into duct-like structures within 1 week. Over the next 3 weeks there was a gradual increase in the number and size of ductules. Morphological examination of duct-like structures showed true lumen formation. Ultrastructurally, cells showed features of ductal cells characterized by well-formed cell junctions, interdigitation of plasma membranes, well-developed cytoplasmic organelles, and apical microvilli. Light microscopic autoradiography showed proliferation of cells lining the ductules throughout the 4-week culture period. Albumin mRNA expression was demonstrable by in situ hybridization with albumin probe in oval cells cultured on collagen gels and embedded in collagen gels. Results of these studies indicate that under these in vitro conditions, oval cells appear to express albumin transcripts but exhibit duct-like morphogenetic features.