Recent gene ablation studies in mice have shown that matriptase, a type II transmembrane serine protease, and prostasin, a glycosylphosphatidylinositol-anchored membrane serine protease, are both required for processing of the epidermis-specific polyprotein, profilaggrin, stratum corneum formation, and acquisition of epidermal barrier function. Here we present evidence that matriptase acts upstream of prostasin in a zymogen activation cascade that regulates terminal epidermal differentiation and is required for prostasin zymogen activation. Enzymatic gene trapping of matriptase combined with prostasin immunohistochemistry revealed that matriptase was co-localized with prostasin in transitional layer cells of the epidermis and that the developmental onset of expression of the two membrane proteases was coordinated and correlated with acquisition of epidermal barrier function. Purified soluble matriptase efficiently converted soluble prostasin zymogen to an active two-chain form that formed SDS-stable complexes with the serpin protease nexin-1. Whereas two forms of prostasin with molecular weights corresponding to the prostasin zymogen and active prostasin were present in wild type epidermis, prostasin was exclusively found in the zymogen form in matriptase-deficient epidermis. These data suggest that matriptase, an autoactivating protease, acts upstream from prostasin to initiate a zymogen cascade that is essential for epidermal differentiation.