Our studies have been focussing on the mechanisms that regulate the proliferation and differentiation in normal tracheobronchial and epidermal epithelial cells. For this purpose human bronchial and epidermal, and rabbit tracheal epithelial cells are used as in vitro model systems. A multi-stage program of hyperplasia and squamous metaplasia has been proposed. Transforming growth factor beta and retinoids influence the proliferation and differentiation of these cells. TGF-beta1 and TGF-beta2 inhibit cell growth but do not induce squamous differentiation. TGF-beta treatment induces several gene products including transglutaminase type II, fibronectin, collagen IV and laminin. This increase is observed at the protein as well as the mRNA level. The regulation of some of these genes is dependent on protein synthesis and the state of differentiation of the tracheobronchial epithelial cell. Several cDNA clones were isolated that encode mRNAs abundantly expressed in squamous differentiated cells and present at low abundancy in undifferentiated cells. These cDNAs have been sequenced and amino acid sequence deduced from their respective DNA sequence. The clone SQ37 represents a 1.0 kb mRNA which encodes a proline-rich protein containing a tandem repeat of eight amino acids. pTG-7 represents a 3.6 kb mRNA encoding transglutaminase type I. Retinoic acid suppresses the expression of SQ37, transglutaminase type I, involucrin and several other squamous cell-specific mRNAs. Tracheobronchial and epidermal epithelial cells contain nuclear retinoic acid receptor (RAR) activity. These cells express relatively high levels of RARalpha and RARgamma and low levels of RARbeta. Retinoic acid treatment increases the level of RARb mRNA in tracheobronchial but not in epidermal cells. We propose that these RARs mediate the action of retinoids on gene expression in tracheobronchial epithelial cells. Lung carcinoma cells show an aberrant expression of RARbeta and RARgamma. A defective expression of RARs may play a role in establishing a malignant phenotype in these cells.