This study examines the action of phorbol 12-myristate 13-acetate (PMA) on the synthesis of cholesterol sulfate in cultured normal and transformed human epidermal keratinocytes and assesses the antagonistic effects by retinoids and bryostatins on PMA action in relation to the multistep program of squamous differentiation. Treatment of normal human epidermal keratinocytes (NHEK) with PMA induces terminal cell division (irreversible growth-arrest) and causes a time- and dose-dependent increase in the incorporation of Na235SO4 into cholesterol sulfate, a marker for squamous cell differentiation. This stimulation in sulfate incorporation appears specific for cholesterol sulfate and is due to increased levels of cholesterol sulfotransferase activity. The increase in cholesterol sulfate accumulation parallels the increase in transglutaminase type I, another marker for squamous differentiation. Several transformed NHEK cell lines do not exhibit increased levels of cholesterol sulfate and transglutaminase type I activity after PMA treatment, indicating that they acquired defects in the regulation of squamous differentiation. Bryostatins 1 and 2, and several diacylglycerol analogues neither inhibit cell proliferation nor increase cholesterol sulfate synthesis or transglutaminase activity, indicating that these agents do not induce terminal differentiation. In contrast, the bryostatins block the increase in cholesterol sulfate and transglutaminase activity as well as the commitment to terminal cell division by PMA. Bryostatin I inhibits the commitment to terminal cell division and the accumulation of cholesterol sulfate significantly even when added 8 h after PMA administration. Retinoids inhibit cholesterol sulfate accumulation and the increase in transglutaminase activity by PMA but do not affect the commitment to terminal cell division. In summary, phorbol esters induce in NHEK cells a program of squamous differentiation. This process of differentiation consists of the commitment to terminal cell division and expression of the squamous phenotype. Expression of this phenotype is accompanied by an accumulation of cholesterol sulfate and increased cholesterol sulfotransferase activity. Bryostatins 1 and 2 and retinoic acid affect this differentiation process at different stages. © 1989.