A model system using a transformed dog kidney cell line (Madin-Darby canine kidney), has been established for studying the process of differentiation. Glucagon responsiveness can be restored to these transformed cells by various differentiation inducers, including prostaglandin E2. Glucagon response was measured in terms of the ability of glucagon to stimulate cAMP production. Induction of glucagon sensitivity seems to be mediated by cAMP. The ability of various prostaglandin analogs to elevate the cAMP level correlates closely with their ability to induce glucagon sensitivity. In fact, 8-Br-cAMP is also a potent inducer. To define the nature of this cAMP-mediated process, we identified several inhibitors of this induction process. These differentiation inhibitors include serum, phorbol ester, and epidermal growth factor. These inhibitors do not have a direct effect on cAMP production by cells in the presence or absence of hormones. Furthermore, induction by 8-Br-cAMP is also inhibited by these agents. Therefore, the site of inhibition is located beyond the point of cAMP production. Possible interaction between cAMP- and epidermal growth factor-dependent phosphorylations is discussed.