The ATP-analogue adenylyl(beta,gamma-methylene)diphosphonate was chosen as substrate for the cytochemical localization of adenylate cyclase (AC) activity. The tissues investigated covered normal rat liver and liver from carcinogen-treated animals with preneoplastic lesions and hepatocellular neoplasms, as well as cultured liver cells. The AC reaction product methylene diphosphonate was precipitated with Pb2+ immediately at the place of production. This approach permitted a precise localization of AC activity by light and electron microscopy. The specificity of the AC reaction was demonstrated by control reactions, including inhibition of AC with 2'5'-dideoxyadenosine and activation with forskolin, glucagon, and cholera toxin. Endogenous phosphatases were inhibited with tetramisole and NAD. In normal liver, AC activity was mainly localized in the sinusoidal membrane of hepatocytes. A distinct gradient in activity was observed within the liver lobule. Hepatocytes localized around the terminal hepatic venule showed a significant higher AC activity compared to hepatocytes near the portal tract. AC was clearly decreased in focal preneoplastic liver lesions of the glycogenotic-basophilic cell lineage leading to hepatocellular carcinomas. Cytochemically detected intensity of AC activity corresponded to data obtained by microbiochemical assays in laser-dissected tissue samples. A remarkable interdependence of AC activity and degree of differentiation was also seen in epithelial rat liver cell lines: Highly differentiated cells show high enzyme activity and vice versa, as shown by both cytochemical and biochemical examinations. It is concluded that alterations in cellular signal transduction caused by alterations in AC activity play an important role in hepatocarcinogenesis.