Embryonic mouse skin undergoes a drastic morphological change from 13 to 16 gestational days, i.e., formation of rudiments of hair follicles and stratification and cornification of interfollicular epidermis. To investigate underlying molecular mechanisms of the morphogenesis, we established an organ culture system that allows skin tissues isolated from 12.5- or 13.5-days postcoitus embryos to develop in a manner that is histologically and temporally similar to the process in vivo. Expression of differentiation markers of epidermal keratinocytes including cholesterol sulfotransferase and cytokeratin K1 was induced in culture, as it occurs also in vivo. The morphogenic process was observed by time-lapse videomicrography. In this culture system, epidermal growth factor (EGF) and transforming growth factor alpha specifically and completely inhibited the hair follicle formation with marginal effects on interfollicular epidermis. The inhibitory action by EGF was reversible and stage specific, i.e., at an early stage of the development of hair rudiments. Among known ligands to the EGF receptor, Schwannoma-derived growth factor and heparin-binding EGF were expressed in in vivo epidermis during the period of the initial formation of hair follicles. EGF receptor is expressed in epidermis throughout the developing period examined. Using an adenovirus vector, we demonstrated that the lacZ gene was transduced into the epidermal and dermal cell layers without appreciable toxicity. These results indicate that the present culture system provides a unique opportunity to investigate molecular mechanisms of skin morphogenesis including the role of EGF signaling under defined experimental conditions.