Mutation of the hairless (hr) gene in mice causes severe abnormalities during the first hair follicle regression (catagen), resulting in complete baldness. Here, we further characterize how hairlessness develops in HRS/J hairless mouse skin (hr) by histology, histochemistry, immunohistology, and in situ hybridization. We show that, in hr skin, only two defined epithelial cell populations in the distal outer root sheath (ORS) retain their integrity, whereas the rest of the ORS disintegrates. The surviving distal ORS forms the characteristic utriculi, whereas the remnants of the bulge get isolated from other epithelial compartments, but retain the capacity to proliferate and to produce either columnar epithelial outgrowths or selected dermal cysts. Normal dermal papilla structures get lost during the development of hairlessness. Based on the patterns of keratin 17 mRNA and neural cell adhesion molecule antigen expression, and on the distribution of alkaline phosphatase activity, we propose that dermal cysts in hr skin arise from (i) the central ORS, (ii) bulge-derived cells, or (iii) the disintegrating proximal ORS under the influence of dermal papilla remnants. The hr mutation seems to disrupt the integrity of key functional tissue units in the hair follicle, possibly due to a dysregulation of normal, catagen-associated apoptosis and/or an impairment of cell adhesion, whereas the distal follicle epithelium (including its stem cell region) seems to be largely protected from this. Thus, hairless mice offer a unique model for dissecting the as yet obscure functional properties of the hr gene product in maintaining follicle integrity during normal catagen.