Long Interspersed Elements (L1 elements) are biologically active retrotransposons that are capable of autonomous replication using their own reverse transcriptase (RT) enzyme. Expression of the normally repressed RT has been implicated in cancer cell growth. However, at present, little is known about the expression of L1-encoded RT activity or the molecular changes that are associated with RT activity in the development of breast cancer. Here, we report that RT activity is widespread in breast cancer cells. The expression of RT protein decreased markedly in breast cancer cells after treatment with the antiretroviral drug, efavirenz. While the majority of cells showed a significant reduction in proliferation, inhibition of RT was also accompanied by cell-specific differences in morphology. MCF7 cells displayed elongated microtubule extensions that adhered tightly to their substrate, while a large fraction of the T47D cells that we studied formed long filopodia projections. These morphological changes were reversible upon cessation of RT inhibition, confirming their dependence on RT activity. We also carried out gene expression profiling with microarrays and determined the genes that were differentially expressed during the process of cellular differentiation. Genes involved in proliferation, cell migration, and invasive activity were repressed in RT-inhibited cells. Concomitantly, genes involved in cell projection, formation of vacuolar membranes, and cell-to-cell junctions were significantly upregulated in RT-inhibited cells. qRT-PCR examination of the mRNA expression of these genes in additional cell lines yielded close correlation between their differential expression and the degree of cellular differentiation. Our study demonstrates that the inhibition of L1-encoded RT can reduce the rate of proliferation and promote differentiation of breast cancer cells. Together, these results provide a direct functional link between the expression of L1 retrotransposons and the development of breast cancer.