We previously demonstrated that the aspartate protease cathepsin D is activated by ceramide derived from acid sphingomyelinase. Increased expression of cathepsin D in the skin has been reported in wound healing, psoriasis and skin tumors. We explored specific functions of cathepsin D during epidermal differentiation. Protein expression and enzymatic activity of cathepsin D increased in differentiated keratinocytes in both stratified organotypic cultures and in mouse skin during epidermal barrier repair. Treatment of cultured keratinocytes with exogenous cathepsin D increased the activity of transglutaminase 1, known to cross-link the cornified envelope proteins involucrin and loricrin during epidermal differentiation. Inhibition of cathepsin D by pepstatin A suppressed the activity of transglutaminase 1. Cathepsin D-deficient mice revealed reduced transglutaminase 1 activity and reduced protein levels of the cornified envelope proteins involucrin and loricrin. Also, amount and distribution of cornified envelope proteins involucrin, loricrin, filaggrin, and of the keratins K1 and K5 were significantly altered in cathepsin D-deficient mice. Stratum corneum morphology in cathepsin D-deficient mice was impaired, with increased numbers of corneocyte layers and faint staining of the cornified envelope only, which is similar to the human skin disease lamellar ichthyosis. Our findings suggest a functional link between cathepsin D activation, transglutaminase 1 activity and protein expression of cornified envelope proteins during epidermal differentiation.