Nevus cells were isolated from the three cutaneous components, epidermis, basal layer, and dermis, of nonmalignant pigmented lesions and were cultured separately in the presence or absence of the phorbol ester 12-0-tetradecanoyl phorbol-13-acetate in medium that supports the rapid proliferation of melanocytic cells. The separation procedure used provided cultures that were essentially free from normal melanocytes (dermis) or fibroblasts (epidermis). In short term culture, nevus cells of all skin compartments expressed markers associated with differentiated melanocytes, such as presence of premelanosomes and melanosomes and elevated tyrosinase levels. Nevus cells also expressed melanoma-associated antigens, such as NGF-receptor, transferrin-related p97, proteoglycan, and HLA-DR as detected with monoclonal antibodies. After several subpassages, cells showed a decreased expression of melanoma-associated antigens, decreased tyrrosinase levels, and melanosomes could no longer be detected. Morphologically, these cells were similar to fibroblasts. The disappearance of melanoma-associated cell surface antigens was concomitant with the appearance of a melanocyte-associated 145 kd protein that might serve as a marker of fibroblast-like differentiation in nevus cells and normal melanocytes. Nevus cell cultures grown in the presence of 12-0-tetradecanoyl phorbol-13-acetate maintained a stable differentiated phenotype throughout their lifespan. As reported earlier, nevus cells in culture, irrespective of the presence or absence of 12-0-tetradecanoyl phorbol-13-acetate, have a finite lifespan in vitro, grow anchorage-independent in soft agar, but do not form tumors when xenografted to nude mice. These studies demonstrate that nevus cells isolated from the epidermal, basal layer, and dermal components of lesional skin can serve as models to characterize the initial steps of tumor progression in a human cell system.