A clinical and histologic study of the sebaceous epithelioma (basal cell epithelioma with sebaceous differentiation) is presented. These tend to have about the same clinical character, localization, and age incidence as undifferentiated basal cell epitheliomas, but they are more often a yellow color. Evidence is presented indicating that they are primary sebaceous gland neoplasms resulting from the proliferation of the basal (germinative) cells of the gland. Sebaceous epitheliomas may arise from an epitheliomatous transformation of a sebaceous adenoma or from disorganized sebaceous hyperplasia. They are precursors of undifferentiated basal cell epitheliomas.