Using a newly developed in vitro sheep hair culture system, we found that the pattern of sheath growth is a function of the level at which the follicle is transected. Two patterns are observed. The type 1 pattern, which occurs after the follicle is transected below the sebaceous gland, shows an equal elongation of the sheath and shaft. The type 2 pattern, which occurs when the follicle is cultured either after transection above the sebaceous gland or with an intact attached epidermis, is characterized by growth of hair shaft clean of sheath. These growth patterns, dictated by the transection level, are observed in both sheep and human follicles, are not dependent on the presence of the sebaceous gland itself, and are not influenced by the presence of cocultured epidermis or infundibulum. Thymidine autoradiography demonstrates that transecting follicles beneath the sebaceous gland leads to an increase in DNA synthesis of the cells in the external root sheath, but does not alter DNA synthesis of the cells in the follicle matrix. Besides the obvious implications to wound closure, these findings indicate that the sebaceous gland demarcates a significant region of the follicle which influences sheath-shaft interactions and that the sheath and the shaft constitute coordinated cell populations which nevertheless respond distinctly to proliferative signals. (C) 1994 Academic Press, Inc.