Notch signaling pathway is an important regulator of epithelial differentiation. Recent studies have characterized multiple ligands, including Jagged1, as mediators of Notch signaling. In this work, an alternatively spliced transcript of Jagged1 was isolated in yeast two‐hybrid screening through interaction with thrombospondin‐1. This transcript, devoid of sequences encoding the transmembrane and intracellular domains of Jagged1, was specific for keratinocytes. Furthermore, the truncated Jagged1 polypeptide devoid of the intracellular domain was detected prominently in the suprabasal keratinocyte layer in neonatal epithelia. The soluble form of Jagged1, when expressed as a tagged polypeptide was efficiently secreted into the culture medium and the N‐terminal signal sequence became cleaved off upon secretion. Direct contact between a cell presenting the transmembrane form of Jagged1 and a Notch‐expressing cell has been proposed as a prerequisite for the signaling event. However, the soluble form of Jagged1, when present in the cell culture medium, was sufficient to induce keratinocyte differentiation. These observations suggest a novel mechanism of how Jagged1 can target cells beyond the direct cell–cell contact in developing epithelia. © 2004 Wiley‐Liss, Inc.