The epidermis is a stratified epithelium which provides a barrier between the organism and the environment protecting it from dehydration and pathogenic insult. A gene essential for development of the epidermis and other stratified epithelia is the transcription factor p63. The p63 gene is transcribed into isoforms that contain (TA) or lack (DeltaN) a transactivation domain. Of these isoforms, only TAp63 isoforms are expressed in the uncommitted surface ectoderm, while DeltaNp63 isoforms are expressed after the surface ectoderm has committed to a stratification program. Consistent with these embryonic expression profiles, we found that TAp63alpha functions as the master switch for initiation of epithelial stratification. Furthermore, TAp63alpha induces proliferation and inhibits terminal differentiation. This inhibition is overcome by the subsequent expression of DeltaNp63alpha which, in this context, acts as a dominant-negative molecule and allows basal keratinocytes to withdraw from the cell cycle and commit to terminal differentiation. These data demonstrate that TA- and DeltaNp63 isoforms have fundamentally different roles during epidermal development and provide new insight into the molecular events required for normal epidermal morphogenesis.