Cholesteatoma is a potentially life-threatening middle ear lesion due to the formation of an inflamed ectopic mass of keratinizing squamous epithelium. Surgical removal remains the only treatment option, emphasizing the need to gain a better understanding of this severe disease. We show for the first time that stem cells residing in cholesteatoma tissue contribute to disease progression. Cells expressing the “stemness” markers Nestin and S100B were detected in middle ear cholesteatoma and auditory canal skin. Isolated Nestin + /S100B + -cells showed the capability for self-renewal, neurosphere formation and differentiation into mesodermal and ectodermal cell types. Compared to auditory canal skin stem cells middle ear cholesteatoma-derived stem cells displayed an enhanced susceptibility to inflammatory stimuli, and this suggested a possible contribution to the inflammatory environment in cholesteatoma tissue. Cholesteatoma derived stem cells were able to differentiate into keratinocyte-like cells using factors mimicking the microenvironment of cholesteatoma. Our findings demonstrate a new perspective on the pathogenesis of cholesteatoma and may lead to new treatment strategies for this severe middle ear lesion.