The squamous cell carcinoma line, SqCC/Y1, like natural squamous epithelia, forms a cornified cell envelope during differentiation which can be directly correlated with an increase in particulate transglutaminase activity. When transglutaminase is activated in these cells by calcium ionophore X-537A, annexin I and involucrin become incorporated into the cornified cell envelope and cannot be extracted with solutions containing sodium dodecyl sulfate (SDS) and β-mercaptoethanol. This effect is specific for annexin I; thus, the amounts of annexins II and IV that were extractable from cells by SDS and β-mercaptoethanol did not change following treatment with inophore X-537A. Annexin I could be cross-linked in vitro to itself and to other endogenous proteins by transglutaminase extracted from the particulate fraction of SqCC/Y1 cells. Immunofluorescence studies showed that cross-linked annexin I and involucrin form and envelope-like structure in SqCC/Y1 cells during differentiation that cannot be extracted by EGTA and Triton X-100. The amount of staining of this envelope structure corresponded directly to the particulate transglutaminase activity of these cells. Annexin I monoclonal and polyclonal antibodies were shown to bind to purified cornified cell envelopes from SqCC/Y1. These studies suggest that particulate transglutaminase regulates a function of annexin I during the differentiation of SqCC/Y1 cells by covalently cross-linking this protein into the cornified cell envelope.