Human herpesvirus 8 is the etiologic agent associated with Kaposi's sarcoma and primary effusion lymphoma (PEL). The K12 RNA, which produces as many as three variants of the kaposin protein, as well as a microRNA, is the most abundant transcript expressed in latent Kaposi's sarcoma-associated herpesvirus infection, and yet it is also induced during lytic replication. The portion of the transcript that includes the microRNA and the kaposin A sequence has been shown to have tumorigenic potential. Genome coordinate 117990, which is within this transcript, has been found to be heterogeneous, primarily in RNAs but also among viral DNA sequences. This sequence heterogeneity affects an amino acid in kaposins A and C and the microRNA. The functional effects of this sequence heterogeneity have not been studied, and its origin has not been definitively settled; both RNA editing and heterogeneity at the level of the viral genome have been proposed. Here, we show that transcripts containing A at position 117990 are tumorigenic, while those with G at this position are not. Using a highly sensitive quantitative assay, we observed that, in PEL cells under conditions where more than 60% of cDNAs derived from K12 RNA transcripts have G at coordinate 117990, there is no detectable G in the viral DNA sequence at this position, only A. This result is consistent with RNA editing by one of the host RNA adenosine deaminases (ADARs). Indeed, we observed that purified human ADAR1 efficiently edits K12 RNA in vitro. Remarkably, the amount of editing correlated with the replicative state of the virus; editing levels were nearly 10-fold higher in cells treated to induce lytic viral replication. These results suggest that RNA editing controls the function of one segment of the kaposin transcript, such that it has transforming activity during latent replication and possibly another, as-yet-undetermined, function during lytic replication.