The induction of cancer on mouse skin by initiation-promotion protocols occurs through stages in which a benign squamous papilloma is an obligate precursor of squamous cell carcinoma. Activation of the Ha-ras gene is sufficient to produce the papilloma phenotype, while additional genetic changes are required for malignant conversion. The introduction of Ha-ras into normal keratinocytes suppresses the expression of differentiation markers, keratin K1 and K10, and loricrin (a cornified envelope precursor) and, to a lesser extent, filaggrin, at the level of transcription. However, cells initiated by Ha-ras express a nonepidermal keratin, K8. The transcription of K8 in these cells is sensitive to the level of medium Ca2+, being abundant in 0.5 mM Ca2+ and not detected in 0.05 mM Ca2+. Epidermal differentiation is regulated by signalling, which involves changes in phosphatidylinositol turnover and intracellular Ca2+. Cells initiated by Ha-ras do not differ from normal keratinocytes in their intracellular Ca2+ response patterns, at least in response to changes in extracellular Ca2+ and serum factors. However, c-Ha-ra keratinocytes have a high basal level of phosphatidylinositol (PI) turnover, which is additive with several other inducers of this pathway, including Ca2+ and aluminum fluoride. Additional studies suggest that high turnover of the PI pathway is incompatible with differentiation-specific gene expression in keratinocytes. We suggest this negative relationship is mediated through elevated diacylglycerol production and chronic down-modulation of protein kinase C. Protein kinase C is known to be essential for expression of differentiation-related genes in keratinocytes.(ABSTRACT TRUNCATED AT 250 WORDS)