The importance of interactions between potentially neoplastic cells and their normal neighbors on malignant progression of precancerous lesions is not well understood. In this study, we have established novel human tissue models that simulate intraepithelial neoplasia in stratified epithelia to investigate the fate and phenotype of neoplastic keratinocyte clones in normal cell context during clonal expansion and early malignant progression. This was accomplished by mixing genetically marked keratinocytes with malignant potential (II-4) with normal keratinocytes at ratios of 1:1, 4:1, 12:1, and 64:1 (normal:II-4) to visualize nests of marked, dysplastic cells in organotypic cultures and in cultures transplanted to nude mice. Four weeks after transplantation of 4:1 mixtures, grafts were normal and demonstrated no beta-galactosidase (beta-gal)-positive cells, suggesting that cells with malignant potential were eliminated from the tissue at this mixing ratio. However, grafted 1:1 mixtures demonstrated persistence of expanded foci of dysplastic cells (4 weeks) and invasion (8 weeks). This demonstrated that the capacity of a keratinocyte clone with neoplastic potential to persist and invade is directly related to the threshold number of such keratinocytes present in the tissue. To explain the failure of II-4 to persist in vivo, the intraepithelial dynamics between the two populations were studied before grafting. Double-stain immunofluorescence for bromodeoxyuridine/beta-gal and filaggrin/beta-gal of mixtures grown in organotypic cultures for 7 days demonstrated that when increasing numbers of normal cells were added (12:1), II-4 ceased to proliferate and expressed filaggrin. This suggests a novel mechanism of tumor suppression wherein contact with normal cells induces cell cycle withdrawal and terminal differentiation of potentially malignant cells. These findings support the view that normal tissue architecture acts as a dominant suppressor of early neoplastic progression in stratified epithelium.