The plasma membrane-associated transglutaminase is responsible for the formation of a cornified envelope during terminal differentiation of epidermal keratinocytes. We have studied the epidermal distribution of this enzyme ("epidermal transglutaminase") and its activity by fluorescence microscopy in histological sections of normal human skin and human skin grafted onto nude mice. Three different techniques were employed: (i) incubation of skin sections with a monoclonal antibody raised against a purified preparation of the enzyme; (ii) incubation of skin sections with dansylcadaverine, a fluorescent substrate of the enzyme, in the presence of Ca++ ions; and (iii) subcutaneous injection of dansylcadaverine into mice, at least 2 months after grafting. The first technique is supposed to detect all enzyme molecules carrying the epitope that is recognized by the antibody, even when the enzyme is catalytically not active; the second should decorate all sites in which membrane-bound transglutaminase activity is located, and the third detects only sites in which transglutaminase is active in vivo. With the first two techniques a broad band of plasma membrane associated fluorescence, reaching from the middle of the spinous layer to the stratum corneum, was detected in both normal and grafted skin. In vivo enzyme activity, however, was found to be restricted to one, or at most two, cell layers at the interface of the stratum granulosum and stratum corneum and to coincide with the layer in which the antigenicity of involucrin, a natural substrate of epidermal transglutaminase, disappeared.