Although the intracellular ultrastructural processing of epidermal growth factor (EGF) and its receptor have been described in cell culture systems, very few studies have examined this phenomenon in intact tissues. We have examined the ultrastructural and biochemical handling of [125I]EGF in the epidermis and hair follicle bulb of intact, viable, 3- to 5-day-old rat skin the EGF receptor distribution of which has already been documented and in which EGF has been shown to be biologically active. After incubation of explants with 10 nM [125I]EGF for 2.5 h at 25 degrees or 37 degrees C, radiolabel was detected over the basal cells of the epidermis and hair follicle outer root sheath, confirming previous light microscope observations. More specifically, silver grains were observed near coated and uncoated plasma membrane and coated membrane invaginations, Golgi apparatus, lysosomal structures, and nuclei. Sodium azide inhibited internalization of label, whereas a series of lysosomal inhibitors (chloroquine, monensin, and iodoacetamide) caused a slight increase in silver grains associated with lysosomal vesicles and a decrease in nuclear label. Biochemical analysis indicated that greater than 35% of radioactivity following incubation at 37 degrees C was in the form of degraded [125I]EGF fragments and that inclusion of chloroquine, monensin, and iodoacetamide reduced this value to 20.8%, 8.6%, and 4.0%, respectively. In addition, chloramine T-prepared [125I]EGF was found to be covalently cross-linked with low efficiency to a protein having the molecular weight of the EGF receptor. These data are discussed in the light of the effects of EGF on epithelial cell proliferation in skin.