Induction of the cell cycle inhibitor p21(WAF1/CIP1) occurs as an early and specific event in most, if not all, terminally differentiating cells tested so far. In the present review, we will focus on the role and control of p21(WAF1/CIP1) function in terminal differentiation of normal epithelial cells, and keratinocytes in particular. As in other cells, increased p21 expression can explain, at least in part, the observed inhibition of CDK activity in terminally differentiating keratinocytes. However, p21 function in differentiation is not indispensable, and may be compensated by a number of additional cell cycle regulatory events, some of which are common to most cells, and others which are cell type specific. One of the main consequences of CDK inhibition is an increase in the growth suppressing activity of p105-Rb and related proteins. However, these proteins may not be the major determinants of growth arrest in terminally differentiating epithelial cells, and a more important role may be played by other, as yet unidentified CDK substrates. The specific modifications of the transcriptional apparatus which are associated with cell cycle arrest in terminal differentiation are poorly understood. Studies of the p21 promoter already indicate that induction of its activity is controlled by transcription factors of the myoD family in myoblasts but not in keratinocytes, while in these latter cells the function of a novel transcriptional coactivator, p300, is required. Future studies of epithelial as well as other terminally differentiating cells will likely focus on the complex interplay between specific differentiation signals and the modifications of the transcriptional and cell cycle apparatus which lead to growth arrest.