Although numerous studies have reported that high frequencies of loss of heterozygosity (LOH) at various chromosomal arms have been identified in breast cancer, differential LOH in the neoplastic epithelial and surrounding stromal compartments has not been well examined. Using laser capture microdissection, which enables separation of neoplastic epithelium from surrounding stroma, we microdissected each compartment of 41 sporadic invasive adenocarcinomas of the breast. Frequent LOH was identified in both neoplastic epithelial and/or stromal compartments, ranging from 25 to 69% in the neoplastic epithelial cells, and from 17 to 61% in the surrounding stromal cells, respectively. The great majority of markers showed a higher frequency of LOH in the neoplastic epithelial compartment than in the stroma, suggesting that LOH in neoplastic epithelial cells might precede LOH in surrounding stromal cells. Furthermore, we sought to examine pair-wise associations of particular genetic alterations in either epithelial or stromal compartments. Seventeen pairs of markers showed statistically significant associations. We also propose a genetic model of multi-step carcinogenesis for the breast involving the epithelial and stromal compartments and note that genetic alterations occur in the epithelial compartments as the earlier steps followed by LOH in the stromal compartments. Our study strongly suggests that interactions between breast epithelial and stromal compartments might play a critical role in breast carcinogenesis and several genetic alterations in both epithelial and stromal compartments are required for breast tumour growth and progression.