Tumor suppressor genes act as recessive determinants of cancer. In Drosophila these genes play a role in normal development and are essential for regulating cell growth and differentiation. Mutations in the gene, lethal(2)giant larvae, l(2)gl, besides causing malignant tumors in the brain and imaginal discs, generate developmental defects in a number of other tissues. Much of the uncertainty regarding the function of the l(2)gl gene product, p127, results from a lack of knowledge as to the precise location of this protein in the cell. We have investigated the cellular and subcellular localization of p127, using confocal and electron microscopy as well as biochemical and cell fractionation procedures. Our analyses indicate that p127 is located entirely within the cell in both the cytoplasm and bound to the inner face of lateral cell membranes in regions of cell junctions. On the membrane, p127 can form large aggregates which are resistant to solubilization by nonionic detergents, indicating that p127 is participating in a cytoskeletal matrix. These findings suggest that the changes in cell shape and the loss of apical-basal polarity observed in tumorous tissues are a direct result of alterations in the cytoskeleton organization caused by l(2)gl inactivation and also suggest that p127 is involved in a cytoskeletal-based intercellular communication system directing cell differentiation.