We have previously shown that the ubiquitously expressed lysosomal cysteine protease, cathepsin L (CTSL), is essential for skin and hair follicle homeostasis. Here we examine the effect of CTSL deficiency on hair follicle development and cycling in ctsl^−/− mice by light and electron microscopy, Ki67/terminal dUTP nick-end labeling, and trichohyalin immunofluorescence. Hair follicle morphogenesis in ctsl^−/− mice was associated with several abnormalities. Defective terminal differentiation of keratinocytes occurred during the formation of the hair canal, resulting in disruption of hair shaft outgrowth. Both proliferation and apoptosis levels in keratinocytes and melanocytes were higher in ctsl^−/− than in ctsl^+/+ hair follicles. The development of the hair follicle pigmentary unit was disrupted by vacuolation of differentiating melanocytes. Hair cycling was also abnormal in ctsl^−/− mice. Final stages of hair follicle morphogenesis and the induction of hair follicle cycling were retarded. Thereafter, these follicles exhibited a truncated resting phase (telogen) and a premature entry into the first growth phase. Further abnormalities of telogen development included the defective anchoring of club hairs in the skin, which resulted in their abnormal shedding. Melanocyte vacuolation was again apparent during the hair cycle-associated reconstruction of the hair pigmentary unit. A hallmark of these ctsl^−/− mice was the severe disruption in the exiting of hair shafts to the skin surface. This was mostly because of a failure of the inner root sheath (keratinocyte layer next to the hair shaft) to fully desquamate. These changes resulted in a massive dilation of the hair canal and the abnormal routing of sebaceous gland products to the skin surface. In summary, this study suggests novel roles for cathepsin proteases in skin, hair, and pigment biology. Principal target tissues that may contain protein substrate(s) for this cysteine protease include the developing hair cone, inner root sheath, anchoring apparatus of the telogen club, and organelles of lysosomal origin (eg, melanosomes).