Development of stratified epithelia, such as the epidermis, requires p63 expression. The p63 gene encodes isoforms that contain (TA) or lack (DeltaN) a transactivation domain. We demonstrate that TAp63 isoforms are the first to be expressed during embryogenesis and are required for initiation of epithelial stratification. In addition, TAp63 isoforms inhibit terminal differentiation, suggesting that TAp63 isoforms must be counterbalanced by DeltaNp63 isoforms to allow cells to respond to signals required for maturation of embryonic epidermis. Our data demonstrate that p63 plays a dual role initiating epithelial stratification during development and maintaining proliferative potential of basal keratinocytes in mature epidermis.