Inconsistent with the view that hair follicle stem cells reside in the matrix area of the hair bulb, we found that label-retaining cells exist exclusively in the bulge area of the mouse hair follicle. The bulge consists of a subpopulation of outer root sheath cells located in the midportion of the follicle at the arrector pili muscle attachment site. Keratinocytes in the bulge area are relatively undifferentiated ultrastructurally. They are normally slow cycling, but can be stimulated to proliferate transiently by TPA. Located in a well-protected and nourished environment, these cells mark the lower end of the "permanent" portion of the follicle. Our findings, plus a reevaluation of the literature, suggest that follicular stem cells reside in the bulge region, instead of the lower bulb. This new view provides insights into hair cycle control and the possible involvement of hair follicle stem cells in skin carcinogenesis.