Retinoic acid (RA), the biologically active derivative of vitamin A, induces a variety of embryonal carcinoma and neuroblastoma cell lines to differentiate into neurons. The molecular events underlying this process are reviewed with a view to determining whether these data can lead to a better understanding of the normal process of neuronal differentiation during development. Several transcription factors, intracellular signaling molecules, cytoplasmic proteins, and extracellular molecules are shown to be necessary and sufficient for RA-induced differentiation. The evidence that RA is an endogenous component of the developing central nervous system (CNS) is then reviewed, data which include high-pressure liquid chromotography (HPLC) measurements, reporter systems and the distribution of the enzymes that synthesize RA. The latter is particularly relevant to whether RA signals in a paracrine fashion on adjacent tissues or whether it acts in an autocrine manner on cells that synthesize it. It seems that a paracrine system may operate to begin early patterning events within the developing CNS from adjacent somites and later within the CNS itself to induce subsets of neurons. The distribution of retinoid-binding proteins, retinoid receptors, and RA-synthesizing enzymes is described as well as the effects of knockouts of these genes. Finally, the effects of a deficiency and an excess of RA on the developing CNS are described from the point of view of patterning the CNS, where it seems that the hindbrain is the most susceptible part of the CNS to altered levels of RA or RA receptors and also from the point of view of neuronal differentiation where, as in the case of embryonal carcinoma (EC) cells, RA promotes neuronal differentiation. The crucial roles played by certain genes, particularly the Hox genes in RA-induced patterning processes, are also emphasized.