Sodium butyrate affects cell differentiation in confluent epidermal keratinocyte cultures by considerably increasing the spontaneous formation of cross-linked envelopes in normal human keratinocytes (NHK). It also favors the development of envelope competence in the Simian virus-40 (SV-40)-transformed human foreskin keratinocyte line SV-K14. It completely abolishes the inhibitory effect of serum and retinoic acid on the expression of plasma membrane-associated transglutaminase. However, other markers of epidermal differentiation that are also under the control of retinoids such as keratins or the enzyme cholesterol sulfotransferase are not affected by butyrate. The level of the cellular retinoic acid binding protein (CRABP) is considerably increased in its presence. Butyrate does not interfere with the binding of retinoids to their cellular binding proteins. Our observations suggest that sodium butyrate stimulates cornified envelope formation via the induction of the plasma membrane-associated transglutaminase required for cornified envelope synthesis and, additionally, by abolishing the inhibitory effect of retinoids on the expression of this enzyme.