The development of a procedure to culture wool follicles from Merino sheep in serum-free conditions has enabled us to investigate the actions of epidermal growth factor (EGF) and transforming growth factor alpha (TGF alpha) on follicle function, including fibre growth. Follicles grown in the absence of growth factors maintained their anagen morphology for 6 days as determined by light microscopy. During this time they incorporated [3H]thymidine into the DNA of the bulb matrix and outer root sheath (ORS) cells and produced fibre keratins as detected by immunohistochemistry. In the presence of EGF and TGF alpha, fibre production ceased after 4 days, as it does following the administration of EGF in vivo. Cessation of fibre growth was not accompanied by regression of the follicle bulb which occurs in vivo. Follicle length growth did not differ significantly from controls and cells in the bulb continued to proliferate. Usually, the structure of the dermal papillae resembled that in control follicles, which was also in marked contrast to changes reported in vivo. In EGF- and TGF alpha-treated follicles, [3H]thymidine continued to be incorporated into DNA of the ORS and bulb after fibre growth ceased. Although wool keratin synthesis ceased, cytokeratins of the epidermis and ORS continued to be produced in the bulb as detected by immunochemistry. These bulb cells were also positive for the periodic acid-Schiff (PAS) reaction indicating the presence of glycogen, a normal component of ORS cells. The observations that cell proliferation continued in the bulb, that glycogen was present and that soft keratins were expressed in these cells suggest that the bulb cell population was induced to differentiate into an ORS phenotype by EGF and TGF alpha.