Cellular and molecular aspects of chemical carcinogenesis in lining epithelia are studied in mouse epidermis by in vivo and in vitro techniques. Normal epidermal growth and differentiation are regulated by extracellular calcium. Calcium may exert its effects indirectly via regulation of intracellular concentrations of sodium and potassium. This control appears to involve phosphatidylinositol turnover and generation of diacylglycerol which activates protein kinase C. Carcinogens alter the regulation of epidermal differentiation. This change is highly correlated to the initiating event in carcinogenesis. Altered cells have a number of characteristics similar to papilloma cells. An activated ras oncogene also alters epidermal differentiation, but this effect is conditional and may be codulated by exposure to a tumor promoter. Initiated cells or mouse epidermal tumors do not transcribe unusually high levels of ras or other known retroviral oncogenes. However, transfection of an activated ras gene into papilloma cells causes them to become highly malignant and the tumors are anaplastic. Phorbol ester tumor promoters accelerate epidermal differentiation, and this can be blocked by antipromoting retinoids which induce a unique transflutaminase possibly counteracting the transglutaminase induced by promoters. DNA strand breaks are produced as a consequence of phorbol ester mediated terminal differentiation and these are blocked by retinoids. While initiation and promotion both involve changes in epidermal differentiation, another genetic change is required prior to carcinoma formation. This change can be accomplished by genotixic agents but not by tumor promoters. Only a subclass of papillomas are at risk to progress to carcinomas.