The functions of transforming growth factor beta-1(TGFbeta1) are cell-context specific. We have found that TGFbeta1 expression in human skin squamous cell carcinoma (SCC) samples has two distinct distribution patterns: (1) either predominantly in suprabasal layers or (2) throughout tumor epithelia including basal proliferative cells. To understand whether the spatial TGFbeta1 expression patterns affect its functions, we have generated several keratinocyte-specific transgenic mouse models in which TGFbeta1 overexpression can be induced either predominantly in the suprabasal epidermis or in the basal layer of the epidermis and hair follicles. Suprabasal TGFbeta1 overexpression inhibits keratinocyte proliferation, suppresses skin carcinogenesis at early stages, but promotes tumor invasion at later stages. In contrast, TGFbeta1 overexpression in the basal layer of the epidermis and hair follicles causes a severe inflammatory skin disorder and epidermal hyperproliferation. Given the importance of inflammation in cancer development, our data suggest that TGFbeta1-induced skin inflammation may override its tumor suppressive effect at early stages during skin carcinogenesis. This hypothesis is further suggested by our recent study that Smad3 knockout mice are resistant to skin chemical carcinogenesis at least in part via abrogation of endogenous TGFbeta1-induced inflammation. This review intends to summarize current insights into the role of TGFbeta1 in skin inflammation and carcinogenesis.