The transglutaminase 1 (TGase 1) enzyme is essential for the assembly of the cell envelope barrier in stratified squamous epithelia. It is usually bound to membranes, but to date most studies with it have involved solution assays. Here we describe an in vitro model system for characterizing the function of TGase 1 on the surface of synthetic lipid vesicles (SLV) of composition similar to eukaryote plasma membranes. Recombinant baculovirus-expressed human TGase 1 readily binds to SLV and becomes active in cross-linking above 10 microM Ca2+, in comparison to above 100 microM in solution assays, suggesting that the membrane surface is important for enzyme function. Involucrin also binds to SLV containing 12-18% phosphatidylserine and at Ca2+ concentrations above 1 microM. In reactions of involucrin with TGase 1 enzyme in solution, 80 of its 150 glutamines serve as donor residues. However, on SLV carrying both involucrin and TGase 1, only five glutamines serve as donors, of which glutamine 496 was the most favored. As controls, there was no change in specificity toward the glutamines of other substrates used by free or SLV-bound TGase 1 enzyme. We propose a model in which involucrin and TGase 1 bind to membranes shortly after expression in differentiating keratinocytes, but cross-linking begins only later as intracellular Ca2+ levels increase. Furthermore, the data suggest that the membrane surface regulates the steric interaction of TGase 1 with substrates such as involucrin to permit specific cross-linking for initiation of cell envelope barrier formation.