To distinguish a basal cell carcinoma (BCC) from a trichoepithelioma can be difficult even for an experienced dermatopathologist. Previously reported differentiating histologic features are relative criteria that may be shared by both tumors. In a review of 30 consecutive cases each of trichoepitheliomas, keratotic BCC, and routine BCC, classic criteria were compared with papillary mesenchymal body formation. Papillary mesenchymal bodies are distinct fibroblastic aggregations that represent abortive attempts to form the papillary mesenchyme responsible for hair induction. Papillary mesenchymal bodies were observed in 93% of all trichoepitheliomas, 7% of all keratotic BCC, and 0% of all routine BCC. Hair bulb formation was observed in 30% of trichoepitheliomas and in none of the BCC. We conclude that papillary mesenchymal body formation is an easily recognizable histologic criterion that is more reliable in differentiating these two tumors than standard criteria, including epidermal connections, keratinization, calcification, foreign body reaction, fibrosis, stromal retraction, tumor mucin, ulceration, frondlike epithelial pattern, and the inflammatory response.