The forkhead transcription factor FOXN1 is required for normal cutaneous and thymic epithelial development. Mutations in FOXN1 give rise to the nude phenotype in mice, rats and man. However, the genes that are regulated by FOXN1 are unknown. To investigate FOXN1 function we expressed an inducible form of the protein, FOXN1ER, that is activated by 4-hydroxytamoxifen in primary human epidermal keratinocytes. Transient activation of FOXN1 decreased the proportion of keratinocytes that formed actively growing clones attributable to stem cell founders and increased the number of abortive clones, without inducing apoptosis. Within 24 hours the majority of cells had initiated terminal differentiation, as assessed by involucrin expression. We performed a cDNA microarray experiment to analyse changes in the transcription of approximately 6000 genes. Following FOXN1 activation we detected increases of two fold or greater in the RNA levels of over 30 genes. Genes promoting growth arrest, survival and differentiation featured prominently and markers of early events in keratinocyte differentiation were also detected. Since one of the induced genes was Akt we investigated whether Akt played a role in terminal differentiation. Activation of PI 3-kinase but not Akt was necessary for FOXN1-induced differentiation. In reconstituted epidermis FOXN1 promoted early stages of terminal differentiation whereas Akt activation was sufficient to induce late stages, including formation of the cornified layers. These results establish a role for FOXN1 in initiation of terminal differentiation and implicate Akt in subsequent events.