Oral epithelial dysplasia (OED) is a premalignant histopathological diagnosis given to lesions of the oral cavity. Its grading suffers from significant inter-/intra-observer variability, and does not reliably predict malignancy progression, potentially leading to suboptimal treatment decisions. To address this, we developed an artificial intelligence (AI) algorithm, that assigns an Oral Malignant Transformation (OMT) risk score based on the Haematoxylin and Eosin (H&E) stained whole slide images (WSIs). Our AI pipeline leverages an in-house segmentation model to detect and segment both nuclei and epithelium. Subsequently, a shallow neural network utilises interpretable morphological and spatial features, emulating histological markers, to predict progression. We conducted internal cross-validation on our development cohort (Sheffield; n = 193 cases) and independent validation on two external cohorts (Birmingham and Belfast; n = 89 cases). On external validation, the proposed OMTscore achieved an AUROC = 0.75 (Recall = 0.92) in predicting OED progression, outperforming other grading systems (Binary: AUROC = 0.72, Recall = 0.85). Survival analyses showed the prognostic value of our OMTscore (C-index = 0.60, p = 0.02), compared to WHO (C-index = 0.64, p = 0.003) and binary grades (C-index = 0.65, p < 0.001). Nuclear analyses elucidated the presence of peri-epithelial and intra-epithelial lymphocytes in highly predictive patches of transforming cases (p < 0.001). This is the first study to propose a completely automated, explainable, and externally validated algorithm for predicting OED transformation. Our algorithm shows comparable-to-human-level performance, offering a promising solution to the challenges of grading OED in routine clinical practice.