Thymocyte maturation into T cells depends on interactions between thymocytes and thymic epithelial cells. In this study, we show that mutations in two transcription factors, Hoxa3 and Pax1, act synergistically to cause defective thymic epithelial cell development, resulting in thymic ectopia and hypoplasia. Hoxa3(+/-)Pax1(-/-) compound mutant mice exhibited more severe thymus defects than Pax1(-/-) single mutants. Fetal liver adoptive transfer experiments revealed that the defect resided in radio-resistant stromal cells and not in hematopoietic cells. Compound mutants have fewer MHC class II+ epithelial cells, and the level of MHC expression detected was lower. Thymic epithelial cells in these mutants have reduced ability to promote thymocyte development, causing a specific block in thymocyte maturation at an early stage that resulted in a dramatic reduction in the number of CD4+8+ thymocytes. This phenotype was accompanied by increased apoptosis of CD4+8+ thymocytes and their immediate precursors, CD44-25-(CD3-4-8-) cells. Our results identify a transcriptional regulatory pathway required for thymic epithelial cell development and define multiple roles for epithelial cell regulation of thymocyte maturation at the CD4-8- to CD4+8+ transition.