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Interactions between lung epithelium and interstitial fibroblasts are increasingly recognized as playing a major role in the progression of several lung pathologies, including cancer. Three-dimensional in vitro co-culture systems offer tissue-relevant platforms to study the signaling interplay between diseased and healthy cell types. Such systems provide a controlled environment in which to probe the mechanisms involved in epithelial-mesenchymal crosstalk. To recapitulate the native alveolar tissue architecture, we employed a cyst templating technique to culture alveolar epithelial cells on photodegradable microspheres and subsequently encapsulated the cell-laden spheres within poly (ethylene glycol) (PEG) hydrogels containing dispersed pulmonary fibroblasts. A fibroblast cell line (CCL-210) was co-cultured with either healthy mouse alveolar epithelial primary cells or a cancerous alveolar epithelial cell line (A549) to probe the influence of tumor-stromal interactions on proliferation, migration, and matrix remodeling. In 3D co-culture, cancerous epithelial cells and fibroblasts had higher proliferation rates. When examining fibroblast motility, the fibroblasts migrated faster when co-cultured with cancerous A549 cells. Finally, a fluorescent peptide reporter for matrix metalloproteinase (MMP) activity revealed increased MMP activity when A549s and fibroblasts were co-cultured. When MMP activity was inhibited or when cells were cultured in gels with a non-degradable crosslinker, fibroblast migration was dramatically suppressed, and the increase in cancer cell proliferation in co-culture was abrogated. Together, this evidence supports the idea that there is an exchange between the alveolar epithelium and surrounding fibroblasts during cancer progression that depends on MMP activity and points to potential signaling routes that merit further investigation to determine targets for cancer treatment., (Copyright © 2017 Elsevier Ltd. All rights reserved.)