A 62-year-old man with a 20-year history of chronic ulcerative colitis and a 9-year history of primary sclerosing cholangitis (PSC) underwent orthotopic liver transplantation because of symptoms related to PSC and cholangiographic features compatible with a biliary neoplasm. Study of the excised liver revealed papillary mucosal lesions in the common hepatic duct and the right and left hepatic ducts as well as cholangiectases and other features typically associated with PSC. The papillary lesions consisted of abundant fibrovascular stroma covered by biliary epithelium with low-grade and high-grade dysplasia. Some periductal glands were also dysplastic. These features distinguished papillary dysplasia from classic biliary papillomatosis. Only one focus of microinvasion was found; there were no metastases. Among 60 cases of PSC in whom the entire liver could be studied after orthotopic liver transplantation, this was the only instance of unequivocal dysplasia. However, in one specimen, papillary hyperplasia was found. Detailed macroscopic and microscopic rereview of 23 livers from our patients with the longest history of PSC (range, 5-24 years) failed to reveal any additional cases with dysplasia. It is concluded that (a) papillary mucosal lesions in PSC may represent papillary dysplasia without invasion; (b) these lesions may evolve from papillary hyperplasia; (c) the process may be largely, if not entirely, in situ; and (d) the prevalence of dysplasia and carcinoma of bile ducts may be less than the 7%-9% reported in the literature for malignancies associated with PSC.