Keratinocytes undergo a process of terminal cell differentiation that results in the construction of a multilayered epithelium designed to produce a structure that functions to protect the body from dehydration, abrasion and infection. These protective properties are due to the production of a crosslinked layer of protein called the cornified envelope. Type I transglutaminase (TG1), an enzyme that catalyzes the formation of epsilon-(gamma-glutamyl)lysine bonds, is the key protein responsible for generation of the crosslinks. The mechanisms that lead to activation of transglutaminase during terminal differentiation are not well understood. We have identified a protein that interacts with TG1 and regulates its activity. This protein, tazarotene-induced gene 3 (TIG3), is expressed in the differentiated layers of the epidermis and its expression is associated with transglutaminase activation and cornified envelope formation. We describe a novel mechanism whereby TIG3 regulates TG1 activity.